Risk Sharing and Amplification in the Global Financial Network
73 Pages Posted: 16 Feb 2022 Last revised: 4 Oct 2022
Date Written: October 2022
We estimate the price elasticities of cross-border loan supply and demand across 19 countries, using a structural model of the global financial network and balance sheet data of internationally-active banks. We find significant heterogeneity in the willingness and capacity of global banks to provide interbank and non-financial loans. We show that this heterogeneity is key to explaining the variation in risk sharing and shock propagation both across countries and over time. In particular, cross-border lending supply has become less elastic since the global financial crisis, resulting in a weakening of international risk sharing. We provide suggestive evidence that the tightening of macroprudential policy has contributed to the decline in risk sharing.
Keywords: Global Banking System, Risk Sharing, Shock Propagation, Cross-border Capital Flows
Suggested Citation: Suggested Citation