International Banks and the Cross-Border Transmission of Business Cycles

38 Pages Posted: 18 Sep 2011 Last revised: 18 Nov 2011

See all articles by Andrei Zlate

Andrei Zlate

Federal Reserve Banks - Federal Reserve Bank of Boston

Ricardo Correa

Board of Governors of the Federal Reserve System

Horacio Sapriza

Board of Governors of the Federal Reserve System

Date Written: June 15, 2011

Abstract

We study the link between the cross-border funding activities of global banks and the international transmission of business cycles. First, using a dataset compiled by the Federal Reserve Board, we document three stylized facts about the operations of foreign banks in the United States: (i) The net borrowing of foreign branches from their parent banks is procyclical with the U.S. economy. (ii) The lending of foreign branches to U.S. firms is procyclical, and also more volatile than the lending of the domestically chartered banks. (iii) The lending of foreign subsidiaries to small U.S. firms is procyclical and more volatile than the corresponding lending by U.S. banks, indicating the presence of an extensive margin in foreign banks' lending to U.S. firms. Second, we build a two-country, dynamic stochastic general equilibrium model to explain these cyclical fluctuations in international bank lending and study their macroeconomic implications. In the model, each economy consists of: one representative household that provides bank deposits; two types of banks, "local" and "global", where the latter collects deposits from abroad and issues loans to foreign firms in addition to its domestic operations; a continuum of monopolistically-competitive firms that are heterogeneous in labor productivity, and that choose endogenously to borrow working capital from either the local or the global bank. Our model provides a framework to analyze the economic impact of proposed Basel III liquidity regulations.

Keywords: International banks, intra-bank lending, firm borrowing, extensive margin

JEL Classification: F41, F44, G21

Suggested Citation

Zlate, Andrei and Correa, Ricardo and Sapriza, Horacio, International Banks and the Cross-Border Transmission of Business Cycles (June 15, 2011). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1929520 or http://dx.doi.org/10.2139/ssrn.1929520

Andrei Zlate (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Ricardo Correa

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Horacio Sapriza

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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