Global Banks and Systemic Debt Crises

48 Pages Posted: 7 Jun 2021 Last revised: 10 Jun 2024

See all articles by Juan Morelli

Juan Morelli

Board of Governors of the Federal Reserve System

Pablo Ottonello

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Diego Perez

New York University (NYU) - Department of Economics

Date Written: June 2021

Abstract

We study the role of global financial intermediaries in international lending. We construct a model of the world economy, in which heterogeneous borrowers issue risky securities purchased by financial intermediaries. Aggregate shocks transmit internationally through financial intermediaries' net worth. The strength of this transmission is governed by the degree of frictions intermediaries face in financing their risky investments. We provide direct empirical evidence on this mechanism showing that around Lehman Brothers' collapse, emerging-market bonds held by more distressed global banks experienced larger price contractions. A quantitative analysis of the model shows that global financial intermediaries play a relevant role in driving borrowing-cost and consumption fluctuations in emerging-market economies, during both debt crises and regular business cycles. The portfolio of financial intermediaries and the distribution of bond holdings in the world economy are key to determine aggregate dynamics.

Suggested Citation

Morelli, Juan and Ottonello, Pablo and Perez, Diego J., Global Banks and Systemic Debt Crises (June 2021). NBER Working Paper No. w28892, Available at SSRN: https://ssrn.com/abstract=3861421

Juan Morelli (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
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Pablo Ottonello

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Diego J. Perez

New York University (NYU) - Department of Economics ( email )

19 West 4th Street
New York, NY 10012
United States

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