CSS SEMINAR - Regina Astri Martinez Fernandez

Friday, December 12, 3:00 p.m.
Center for Social Complexity Suite
Research Hall, Third Floor

"International Banking Flows and "Bad" Credit Booms: Do Booms Go with the Flow?"

Regina Astrid Martinez Fernandez, Lecturer
Department of Economics
Columbian School of Arts and Sciences
George Washington University

ABSTRACT: The international lending activity of banks has raised concerns among policy-makers due to its potential impact on domestic economies.
This paper examines the relation between international banking flows and episodes of domestic credit expansion that end in financial crises ("bad" credit booms). It also analyzes the drivers of each of the two types of international banking flows: flows to the banking sector and to the non-banking sector. With a sample of 80 countries from 1980 to 2012, the results indicate that international banking flows to the banking sector are related to 'bad" credit booms in the recipient country, while those to the non-banking sector are not. This paper also finds that the composition of the international banking loans is driven by the monitoring technology used by international bank lenders to monitor each borrowing sector. The "safer" sector will be less monitored and, since monitoring is costly, it is optimal for the international lender to lend more to this sector.  Thus, countries with mechanisms in place to make the banking sector more "safe" - such as government guarantees, fiscal capacity to execute them, and high institutional quality - will receive more international interbank loans, which makes these countries more vulnerable to "bad" credit booms.