Global Banking and International Business Cycles

33 Pages Posted: 25 Aug 2010

See all articles by Zeno Enders

Zeno Enders

University of Heidelberg

Robert Kollmann

ECARES, Université Libre de Bruxelles; University of Paris XII - Department of Economics; Centre for Economic Policy Research (CEPR)

Gernot J. Müller

University of Tuebingen - Department of Economics

Date Written: September 2010

Abstract

This paper incorporates a global bank into a two-country business cycle model. The bank collects deposits from households and makes loans to entrepreneurs, in both countries. It has to finance a fraction of loans using equity. We investigate how such a bank capital requirement affects the international transmission of productivity and loan default shocks. Three findings emerge. First, the bank's capital requirement has little effect on the international transmission of productivity shocks. Second, the contribution of loan default shocks to business cycle fluctuations is negligible under normal economic conditions. Third, an exceptionally large loan loss originating in one country induces a sizeable and simultaneous decline in economic activity in both countries. This is particularly noteworthy, as the 2007-09 global financial crisis was characterized by large credit losses in the US and a simultaneous sharp output reduction in the US and the Euro Area. Our results thus suggest that global banks may have played an important role in the international transmission of the crisis.

Keywords: bank capital requirements, credit losses, global banking, global financial crisis, international business cycles

JEL Classification: F3, F4, G1, G2

Suggested Citation

Enders, Zeno and Kollmann, Robert and Müller, Gernot J., Global Banking and International Business Cycles (September 2010). CEPR Discussion Paper No. DP7972. Available at SSRN: https://ssrn.com/abstract=1664904

Zeno Enders (Contact Author)

University of Heidelberg ( email )

Robert Kollmann

ECARES, Université Libre de Bruxelles ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium

University of Paris XII - Department of Economics ( email )

61 avenue du General de Gaulle
Creteil cedex, 94010
France

HOME PAGE: http://www.robertkollmann.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Gernot J. Müller

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

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