International Bank Portfolios: Short- and Long-Run Responses to the Business Cycle
48 Pages Posted: 8 May 2007
Date Written: March 2007
Abstract
International bank portfolios constitute a large component of international country portfolios. Yet, their response to macroeconomic conditions and their impact on the international transmission of business cycles developments remains largely unexplored. We use a novel dataset on banks' international portfolios to answer three questions. First, what are the long-run determinants of banks' international portfolios? Second, how do banks' international portfolios adjust to short-run macroeconomic developments? Third, does the speed of adjustment change with the degree of financial integration? We provide evidence of significant long-run cointegration relationships between cross-border assets and liabilities of banks and key macroeconomic variables. Both, the long-run determinants of banks' international portfolios as well as the short-run dynamics show a significant degree of heterogeneity across countries and, to some extent, over time. Gravity-type variables help explaining differences in the speed of adjustment to new equilibria.
Keywords: international bank portfolios, macroeconomic developments, transmission channels
JEL Classification: F32, F42, F34
Suggested Citation: Suggested Citation
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