Working Paper

Foreign Currency Bank Funding and Global Factors

Authors

  • Signe Krogstrup
  • Cedric Tille
Publication Date

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.

Info

JEL Classification
F32, F34, F36

Key Words

  • capital flows
  • cross-border transmission of shocks
  • European bank balance sheets
  • Spillovers