DP10314 Global Liquidity and Drivers of Cross-Border Bank Flows

Author(s): Eugenio Cerutti, Stijn Claessens, Lev Ratnovski
Publication Date: December 2014
Keyword(s): Capital Flows, Global liquidity, International Banking
JEL(s): F21, F34, G15, G18, G21, G28
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10314

This paper studies the determinants of global liquidity using data on cross-border bank flows, with a longer time series and broader country sample than previous studies. We define global liquidity as non-price determinants of cross-border credit supply, consistent with its meaning as the ?ease of financing? in international financial markets. We find that global liquidity is driven primarily by uncertainty (VIX), US monetary policy (term premia), and UK and Euro Area bank conditions (proxied by leverage and TED spreads). This expands on previous studies by highlighting non-US drivers of global liquidity, and is consistent with the dominant role of European banks in cross-border lending. We also show that borrowing countries can limit their exposures to global liquidity fluctuations through adapting their macro frameworks, capital flow management tools, and bank regulation.