Financial Stress in Lender Countries and Capital Outflows from Emerging Market Economies

45 Pages Posted: 30 Oct 2018

See all articles by Ilhyock Shim

Ilhyock Shim

Bank for International Settlements (BIS)

Kwanho Shin

Korea University

Date Written: September 1, 2018

Abstract

We investigate if financial stress in countries where international banks are headquartered is a major driver of banking outflows from emerging market economies (EMEs). We find that when financial stress measured by sovereign or bank CDS spread or corporate bond spread increases, international banks decrease their lending to EMEs, which acts as a major driver of capital outflows from EMEs. In particular, financial stress in lender countries is a more important driver than the local financial conditions and macroeconomic fundamentals of EMEs. Such results generally hold even after the Global Financial Crisis (GFC) period, but to a lesser extent. When we divide the total amount of international lending into subcomponents, cross-border lending to EMEs is more susceptible to financial stress in lender countries than is local lending, and that local lending in foreign currency is more stable than is cross-border lending. Our findings suggest that it is desirable for EME policymakers to promote diversification of lender countries and induce more borrowing from local subsidiaries than cross-border lenders.

Keywords: capital outflows, cross-border claims, emerging market economies, financial stress, local claims

JEL Classification: E44, F15, F21, F34, F38

Suggested Citation

Shim, Ilhyock and Shin, Kwanho, Financial Stress in Lender Countries and Capital Outflows from Emerging Market Economies (September 1, 2018). BIS Working Paper No. 745, Available at SSRN: https://ssrn.com/abstract=3275761

Ilhyock Shim (Contact Author)

Bank for International Settlements (BIS) ( email )

78F, Two International Finance Centre
8 Finance Street, Central
Hong Kong, n/a n/a
Hong Kong

HOME PAGE: http://www.bis.org/author/ilhyock_shim.htm

Kwanho Shin

Korea University ( email )

1 Anam-dong 5 ka
Sunbuk-Ku, Department of Economics
Seoul 136-701
Korea
82-2-3290-2220 (Phone)
82-2-3290-2719 (Fax)

HOME PAGE: econ.korea.ac.kr/~khshin

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