While global uncertainty—measured by the VIX—has proven to be a robust global “push” factor of international capital flows, there has been no systematic study assessing the role of uncertainty in driving bilateral capital flows. This paper examines the effects of higher country-specific uncertainty on cross-border banking flows using data from the Bank for International Settlements Locational Banking Statistics. The bilateral structure of this data allows disentangling supply factors from demand factors, thereby helping identify the effect of higher uncertainty on cross-border banking flows from other confounding factors. The results of this analysis suggest that: (i) uncertainty in a source country (domestic economy) is both a lender-specific push and pull factor that robustly predicts a decrease in outflows (cross-border lending) and inflows (cross-border borrowing); (ii) the decline in cross-border borrowing is larger than the decline in cross-border lending—that is, the net cross-border position of the banking sector increases; (iii) despite a decline in cross-border bank lending in the absolute sense, the share of cross-border bank lending in total bank lending increases, suggesting a portfolio rebalancing; (iv) this rebalancing occurs only when banks are lending to borrowers in advanced economies, but not to those in emerging market economies.
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We are particularly grateful to Robert Kollmann, Kenza Benhima (discussant), and Taehoon Lim (discussant) for extensive comments. We are also thankful to Nick Bloom, Yongsung Chang, Eugene Choo, Francis Dennig, Bernard Dumas, Kyunghoon Kim, You Suk Kim, Yevgeniya Korniyenko, Hyun Chang Lee, Cameron McLoughlin, Junghwan Mok, Ki Young Park, Yongcheol Shin, Ling Zhu, and the seminar participants at the Bank of Korea, European Commission Conference on International Financial Integration in a Changing Policy Context in Brussels, KEA-KAEA International Conference in Seoul, Korea Institute for International Economic Policy, Yale-NUS College, Yonsei University, and the 12th Joint Economics Symposium at National University of Singapore for useful suggestions. Suhaib Kebhaj and Chansik Yoon provided excellent research assistance. This work was supported (in part) by the Yonsei University Future-leading Research Initiative of 2017 (2017-22-0152). The views expressed are those of the authors and do not necessarily represent those of the IMF or its policy. Any remaining errors are the authors’ sole responsibility.
© 2019 Elsevier Ltd
All Science Journal Classification (ASJC) codes
- Economics and Econometrics