Risk Sharing and Amplification in the Global Banking Network

66 Pages Posted: 16 Feb 2022 Last revised: 14 Feb 2024

See all articles by Leslie Sheng Shen

Leslie Sheng Shen

Federal Reserve Banks - Federal Reserve Bank of Boston

Tony Zhang

Board of Governors of the Federal Reserve System

Date Written: October 1, 2022

Abstract

We provide a systematic analysis of banks' role in both sharing risk and propagating shocks in the global financial network. Using a structural model and bilateral international bank lending data, we estimate the price elasticities of cross-border loan supply and demand across 19 countries. We find significant heterogeneity in the willingness and capacity of banks to provide interbank and corporate loans. We show that this heterogeneity is key to explaining the variation in international risk sharing and shock propagation across countries and over time. In particular, cross-border lending supply has become less elastic since the global financial crisis, resulting in a decline in international risk sharing and shock propagation. We provide suggestive evidence that the tightening of macroprudential policy has contributed to the decline.

Keywords: Global Banking Network, Risk Sharing, Shock Propagation, Capital Flows

Suggested Citation

Shen, Leslie Sheng and Zhang, Tony, Risk Sharing and Amplification in the Global Banking Network (October 1, 2022). Available at SSRN: https://ssrn.com/abstract=4032741 or http://dx.doi.org/10.2139/ssrn.4032741

Leslie Sheng Shen

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

600 Atlantic Avenue
Boston, MA 02210
United States

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

Tony Zhang (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

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