Macroeconomic Shocks and Banks' Foreign Assets

Authors


  • Financial support from the European Commission DG Research in cooperation with DG ECFIN and DG ESTAT (Contract No. SCS8-CT-2004-502642) is gratefully acknowledged. We thank Jörg Döpke, Deborah Lucas, Steven Ongena, Christian Pierdzioch, Andreas Worms, two anonymous referees, and seminar participants at the first research meeting and the first conference of the FINPROP consortium, at the Global Finance Conference 2005, and at the Universities of Munich and Innsbruck for helpful comments. Roberto Colavecchio and Laura Krische have provided most efficient research assistance. All remaining errors and inaccuracies are solely our own responsibility. A first version of this paper was written while Kai Carstensen and Andrea Schertler were affiliated with the Kiel Institute for the World Economy (IfW).

Abstract

Recent developments in international financial markets have highlighted the role of banks in the transmission of shocks across borders. We employ dynamic panel methods for a sample of OECD countries to analyze whether banks' foreign assets react to macroeconomic shocks at home and abroad. We find that banks reduce their foreign assets in response to a relative increase in domestic interest rates, and they increase their foreign assets when the growth rate of world energy prices rises. The responses are characterized by a temporal overshooting and a dynamic adjustment process that extends over several quarters.

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