Lending cuts by banks directly affect the firms borrowing from them, but also indirectly depress economic activity in the regions in which they operate. This paper moves beyond firm-level studies by estimating the effects of an exogenous lending cut by a large German bank on firms and counties. I construct an instrument for regional exposure to the lending cut based on a historic, postwar breakup of the bank. I present evidence that the lending cut affected firms independently of their banking relationships, through lower aggregate demand and agglomeration spillovers in counties exposed to the lending cut. Output and employment remained persistently low even after bank lending had normalized. Innovation and productivity fell, consistent with the persistent effects.

Disentangling the effects of a banking crisis: evidence from German firms and counties

Sudden Stops, Financial Crises, and Leverage

This paper reviews the rapidly growing empirical literature on the drivers of capital flows to emerging markets. The empirical evidence is structured based on the recognition that the drivers of capital flows vary over time and across different types of capital flows. The drivers are classified using the traditional “push vs. pull” framework, which is augmented by a distinction between cyclical and structural factors. Push factors are found to matter most for portfolio flows, somewhat less for banking flows, and least for FDI. Pull factors matter for all three components, but most for banking flows. A historical perspective suggests that the recent literature may have overemphasized the importance of cyclical factors at the expense of longer-term structural trends.

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What drives capital flows to emerging markets? a survey of the empirical literature

I show that monetary policy divergence vis-a-vis the U.S. has larger spillover effects in emerging markets than advanced economies. The monetary policy of the U.S. affects domestic credit costs in other countries through its effect on global investors’ risk perceptions. Capital flows in and out of emerging market economies are particularly sensitive to fluctuations in such risk perceptions and have a direct effect on local credit spreads. Domestic monetary policy is ineffective in mitigating this effect as the pass-through of policy rate changes into short-term interest rates is imperfect. This disconnect between short rates and monetary policy rates is explained by changes in risk perceptions. A key policy implication of my findings is that emerging markets’ monetary policy actions designed to limit exchange rate volatility can be counterproductive.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

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U.S. Monetary Policy and International Risk Spillovers

Capital flows and the international credit channel

We construct a new data set for gross capital inflows during 1996-2014 for 85 countries at a quarterly frequency. We decompose debt inflows by borrower type: banks, corporates and sovereigns. Using our new data, we present dynamic and cross sectional patterns in capital inflows as a function of global push factors and countries' own business cycles. This exercise reveals that patterns evident in aggregate capital flows data do not hold up consistently across different borrower types. When global risk appetite is low, as proxied by high VIX, capital flows into banks and corporates decline both in advanced economies (AE) and in emerging markets (EM). This is also true for EM sovereigns but not for AE, whose sovereign borrowing does not respond to VIX. Banks' and corporates' borrowing, both in EM and in AE are procyclical, whereas EM's sovereigns exhibit counter-cyclical borrowing. Capital inflows are procyclical in all assets classes except for portfolio debt inflows to EM, which exhibit a countercyclical pattern driven mainly by EM sovereigns and to some extent by EM corporates. Our results highlight the importance of separating capital flows by borrower type for understanding potential systemic risks related to capital flows, and show the difficulty of establishing robust stylized facts about capital flows' dynamics in a mixed sample of emerging and advanced countries.

Gross capital flows by banks, corporates, and sovereigns

We construct a new quarterly data set of international capital flows broken down by sector: banks, corporates and sovereigns Using our novel data set, we establish several key facts that demonstrate the importance of distinguishing in- and outflows by the domestic sectoral identity We find that public sector flows may serve as a countervailing force to private sector flows, especially in emerging markets (EMs), as these flows respond differently not only to country-specific fundamentals but also to global shocks The high inflow-outflow correlation observed in total capital flow data is driven by within-sector flows, especially those of AE banks In general, inflows and outflows of AEs and inflows to EMs are primarily AE banks’ transactions, and, as a consequence, respond similarly to capital flow drivers By contrast, EM outflows respond differently to global shocks and changes in fundamentals, leading to lower inflow-outflows correlations for EMs

Gross Capital Flows by Banks, Corporates and Sovereigns

We study the relationship between bank geographic complexity and risk using a unique dataset of 96 global bank holding companies (BHCs) over 2008–2016. From data on the affiliate network of internationally active banking entities, we construct a measure of geographic coverage and complexity for each BHC. We find that higher geographic complexity heightens banks’ capacity to absorb local economic shocks, reducing their risk. However, higher geographic complexity can also help banks soften the impact of prudential regulation, increasing their risk. Bank geographic complexity therefore has a Janus face, decreasing some but increasing other aspects of bank risk.

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The Janus face of bank geographic complexity

Financial Crises and Innovation

Emerging market firms frequently borrow in foreign currency (FX), but their assets are often denominated in domestic currency. This behavior leads to an FX mismatch on firms balance sheets, which can harm their net worth in the event of a depreciation. I use a large, unanticipated, and exogenous depreciation episode and a unique dataset to identify the real and financial effects of firm balance sheet shocks. I construct a new dataset of all listed non-financial firms, matched to their banks, in Mexico over 2008q1-2015q2. This dataset combines firm-level balance sheets and real outcomes, currency composition of both assets and liabilities, and firms' loan-level borrowing from banks in peso and FX. This data allows me to control for shocks to firms' credit supply to identify the balance sheet shock and examine its real consequences. I find that non-exporting firms that have a larger FX mismatch experience greater negative balance sheet effects following the depreciation. Among these, smaller firms see a decrease in loan growth, resulting in stagnant employment growth and decreased growth in physical capital relative to firms with smaller FX mismatch. Larger firms with a large FX mismatch also have lower growth in FX loans following the shock, but are able to increase borrowing in peso loans, resulting in relatively higher growth in employment and physical capital. My results imply that firms are subject to net worth based borrowing constraints, and that these constraints are more binding on smaller firms and for loans in FX.

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Bryan Hardy

Papers

Gross capital flows by banks, corporates, and sovereigns

Gross Capital Flows by Banks, Corporates and Sovereigns

The Janus face of bank geographic complexity

Financial Crises and Innovation

Foreign currency borrowing, balance sheet shocks and real outcomes