DP12933 Foreign Currency Bank Funding and Global Factors

Author(s): Signe Krogstrup, C├ędric Tille
Publication Date: May 2018
Keyword(s): Capital Flows, cross-border transmission of shocks, currency mismatch, European bank balance sheets, push factors, Spillovers
JEL(s): F32, F34, F36
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12933

The literature on drivers of capital flows stresses the prominent role of global financial factors. Recent empirical work, however, highlights how this role varies across countries and time, and this heterogeneity is not well understood. We revisit this question by focusing on financial intermediaries' funding flows in different currencies. A portfolio model shows that the sign and magnitude of the response of foreign currency funding flows to global risk factors depend on the financial intermediary's pre-existing currency exposure. Analysis of data on European banks' aggregate balance sheets lends support to the model predictions, especially in countries outside the euro area.