Determinants and Effects of Maturity Mismatches in Emerging Markets: Evidence from Bank Level Data

Despite the extensive work on currency mismatches, research on the determinants and effects of maturity mismatches is scarce. In this paper I show that emerging market maturity mismatches are negatively affected by capital inflows and price volatilities. Furthermore, I find that banks with low maturity mismatches are more profitable during crisis periods but less profitable otherwise. The later result implies that banks face a tradeoff between higher returns and risk, hence channeling short term capital into long term loans is caused by cronyism and implicit guarantees rather than the depth of the financial market. The positive relationship between maturity mismatches and price volatility, on the other hand, shows that the banks of countries with high exchange rate and interest rate volatilities can not, or choose not to hedge themselves. These results follow from a panel regression on a data set I constructed by merging bank level data with aggregate data. This is advantageous over traditional studies which focus only on aggregate data

Bank Size And Macroeconomic Shock Transmission: Does The Credit Channel Operate Through Large Or Small Banks?

In this paper, I use U.S. call report data to construct a larger panel dataset with bank-level observations. I find that larger banks\u27 lending is considerably more sensitive to the strength of their borrowers\u27 and their own balance sheets compared to smaller banks and that the sensitivities to borrower balance sheets are larger in magnitude compared to lender balance sheets. When I incorporate various macroeconomic shocks (identified by an estimated DSGE model) into the empirical model, I similarly find that the transmission of shocks to the real economy operates mostly through large bank lending and borrower balance sheets

Bankruptcy Resolution Capacity And Economic Fluctuations

In this paper, I build a partial equilibrium model and uncover a relationship between regional macroeconomic fluctuations and bankruptcy resolution capacity that depends on the cyclicality of bankruptcy. If the frequency of bankruptcy is countercyclical, the model predicts that fluctuations are more severe in regions with lower bankruptcy resolution capacity. This is because, in these regions, banks\u27 bad-loan recovery costs are higher (due to the length of the bankruptcy proceedings) and their lending is more sensitive to macroeconomic shocks that impact the likelihood of bankruptcy. Therefore, shocks that increase the frequency of bankruptcy and decrease output at the same time, for example, are amplified due to a lower level of bank lending. I draw opposite conclusions when bankruptcy is procyclical (i.e., economic fluctuations are less severe in regions with low bankruptcy resolution capacity). In the second half of the paper, I find evidence indicating that bankruptcy is countercyclical and that in the U.S. states with lower bankruptcy resolution capacity, economic fluctuations, consistent with the model\u27s predictions, are more severe. © 2014 Elsevier Inc.

The Effects Of Global Bank Competition And Presence On Local Economies: The Goldilocks Principle May Not Apply To Global Banking

This paper is the first to show that advanced economies are least stable when the market power of global banks in these economies are neither too high nor too low. When global banks have higher/lower market power in one economy than the others, they don\u27t shift funds across countries by as much in response to shocks, and the economies become more stable with robust lending. The reason is that increasing (decreasing) loans causes a sharper decrease (increase) in global banks\u27 returns in the economy where they have high market power. It is at moderate levels of market power at which global banks (unlike domestic banks that only lend locally) substantially reallocate funds across countries and generate high volatility. This finding, unlike the usual unidirectional relationships in the literature, implies that countries should either allow few large global banks to dominate their credit markets or minimize their exposure to global banking. The middle ground, the Goldilocks region, is turbulent

Searching for the source of macroeconomic integration across advanced economies

This article estimates a two-country open economy DSGE model by using US and euro area data. The baseline model, where the two regions are linked only through the trade of goods and risk-free bonds, fails to replicate the high cross-regional macroeconomic correlation in the data. I search for the determinants of this correlation by reconfiguring the model\u27s shock processes in two ways. First, I include shocks that symmetrically affect each region. Second I allow for the transmission of shocks between the two regions. Whilst both of these changes considerably improve the model\u27s performance along the international dimension, common shocks appear to be the main drivers of cross-regional correlation. Under both specifications, comovements of variables are mostly determined by demand and financial shocks. Productivity, cost-push, and exchange rate shocks, by contrast, play a limited role

Automatic stabilizer feature of fixed exchange rate regimes

This paper shows that countries characterized by a financial accelerator mechanism may reverse the usual finding of the literature -- flexible exchange rate regimes do a worse job of insulating open economies from external shocks. I obtain this result with a calibrated small open economy model that endogenizes foreign interest rates by linking them to the banking sector's financial leverage. This relationship renders exchange rate policy more important compared to the usual exogeneity assumption. I find empirical support for this prediction using the Local Projections method. Finally, 2nd order approximation to the model finds larger welfare losses under flexible exchange rate regimes.Exchange rates EMBI Financial accelerator Welfare

Testing for Balance Sheet Effects in Emerging Market Countries

This paper tests the presence of balance sheets effects and analyzes the implications for exchange rate policies in emerging markets. The results reveal that the emerging market bond index (EMBI) is negatively related to the banks\u27 foreign currency leverage, and that these banks\u27 foreign currency exposures are relatively unhedged. Panel SVAR methods using EMBI instead of advanced country lending rates find, contrary to the literature, that the amplitude of output responses to foreign interest rate shocks are smaller under relatively fixed regimes. The findings are robust to the local projections method of obtaining impulse responses, using country specific and GARCH-SVAR models

Capital Flows, Maturity Mismatches and Profitability in Emerging Markets: Evidence from Bank Level Data

Despite the extensive work on currency mismatches, research on the significance of maturity mismatches in emerging market countries is scarce. In this paper, I show that emerging market banks' maturity mismatches increase during periods of high capital inflows, and that banks with high maturity mismatches are less profitable during crisis periods but more profitable otherwise. Hence, banks face a tradeoff between higher returns and risk. These results follow from a panel regression on a data set I constructed by merging bank level data with aggregate data. A simple Diamond-Dybvig (1983) partial equilibrium framework motivates the empirical analysis.bank level data, maturity mismatches, liquidity, profitability and debt structure ratios, price volatility, mergentonline.