A comparison of the internal and external determinants of global bank loans: Evidence from bilateral cross-country data

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1 A compaison o he inena an exena eeminans o goba ban oans: Evience om biaea coss-couny aa Uuc Aysun a* Ra Hepp b a Univesiy o Cena Foia, Oano, FL3816 b Depamen o Economics, Foham Univesiy, Bonx, NY, Unie Saes Absac This pape ins ha acos eemine ousie o a couny ae moe cosey eae o he goba ban oans she eceives. These oans ae moe sabe when goba bans ae ess compeiive an have a highe pesence in he ecipien couny. We obain ou esus by using aa on he biaea oans posiions o 15 counies an a unique mehooogy o ieniy an compae he inepenen eecs o exena an inena acos. We in suppo o ou empiica esus an aw moe eaie ineences o compeiion an goba ban pesence by soving a simpe moe o goba baning. JEL Cassiicaion: E; F3; G15; G1 Keywo(s): Coss-couny oans, goba bans, compeiion, oveapping geneaions moe. * Coesponing auho: Univesiy o Cena Foia Coege o Business Aminisaion, 000 Cena Foia Bv., P.O. Box 16100, Oano, FL Emai: uaysun@bus.uc.eu Te: (+1)

2 1. Inoucion Ove he pas 15 yeas, bans have become moe goba, age an an impoan souce o inance o counies. 1, These eveopmens have spae a api expansion in he ieaue on goba baning (we iscuss his ieaue beow). Whie his expansion has been agey hough papes invesigaing he eecs o goba bans on economic sabiiy an inenaiona business cyces (especiay ae he ey oe ha hey paye uing he cisis), suies ha ocus on he ynamic eeminans o goba ban ows ae eaivey sma in numbe. In his pape, we ocus on he goba oans o bans an use hei couny-speciic ening behavio as a means o eemining why oans ow in an ou o counies. 3 Thoughou he pape, ou anaysis evoves aoun a simpe quesion: Ae he coss-couny ows o ban oans eemine mosy by inena o exena acos? I inena acos ae moe impoan, his cou sugges ha an economy wih a high, obus gowh ae an heahy boowe baance shees wou eceive moe oans om goba bans an ha hese oans wou iminish in counies ha ae peoming pooy; counies wou have cono ove hei own esinies. Convesey, i exena acos ae moe impoan, he sae o an economy may no be songy eae o he oans i eceives an economies may be moe suscepibe o exena eveopmens. These answes o ou quesion, abei, o no have any impicaions o economic sabiiy. Coninuing wih ou exampe above, i is possibe o a apiy gowing economy o be esabiize by exena uning i hese uns ae aocae o ineicien invesmens. I is aso 1 The oeign caims o Ban o Inenaiona Seemens (BIS) epoing bans as a shae o wo GDP, o exampe, have incease om 5.9 o 3.9 pecen om 1995 o 011 an he Lene inex o ban compeiion has incease om 0.19 o 0.7 om 1996 o 010, inicaing a ecease in he egee o compeiion. We shou noe, howeve, ha boh vaiabes have emonsae ieen ens, a negaive one ae 007 in paicua. The oeign caims aa ae obaine om he BIS quaey saisics an he annua aios ae compue by aveaging he quaey vaiabes. The Lene inex is om he FRED aabase o he Feea Reseve Ban o S. Louis. Ohe inicaos o ban concenaion, aso obaine om FRED, simiay evea a eeioaion o compeiive conuc. The Boone inicao o ban compeiion in he wo has incease om o om 1997 o 010 an he 3-ban asse concenaion has incease om 3.1 o 70. pecen om 1995 o 011. See Buno an Shin (013), an Ceoei an Gobeg (01) o simia ens in ban gobaizaion. 3 Whie he goba expansion o bans has been obseve o a asse ypes, oans consiue he ages shae. The shae o oans amongs oeign caims o a BIS epoing bans was appoximaey 7 pecen in

3 possibe o goba ban ening o have a sabiizing eec when hey ae mosy eemine by exena acos given ha hese acos ae eaivey moe sabe. Ou anaysis oes, howeve, aow us o aw impoan concusions o economic inegaion an he aignmen o business cyces. I goba ban ows ae mainy eemine by exena acos, o exampe, his wou sugges ha economies ae now moe inegae inanciay an ha goba inancia cises, such as he cisis, cou be moe equeny obseve. Fo peios no chaaceize by a cisis, he impoance o exena acos wou impy a highe egee o aignmen in goba business cyces an i wou sugges ha macoeconomic imbaances acoss counies have become a ess ciica inenaiona concen compae o goba inancia sabiiy. Whie ou quesion is simpe, i is vey boa an ining an answe is a om saighowa. Face wih hese obsaces, we oow a ew caeu seps o aw empiica ineences an bui a heoeica moe o guie us in escibing an compaing he eecs o exena an inena shocs. We is naow own ou empiica invesigaion by ocusing on he sengh o boowe baance shees, appoximae by he ea GDP gowh ae an he unempoymen ae, an he goba bans uning coss, measue by ineban boowing aes an eposi aes, as he poenia inena an exena eeminans o ban ening, especivey, since hese ae he mos commony use inicaos o cei wohiness an he cos/ease o ening (e.g. Ashca an Campeo, 007; Kashyap an Sein, 000). Nex, we consuc a quaey aase ha incues he ousaning amoun o biaea ban oans acoss 15 avance economies (10 pais). The aa ae om he Ban o Inenaiona Seemens (BIS) ocaiona baning saisics an span he 000Q1-01Q peio. We hen combine he BIS aa wih vaious boowe baance shee an ban uning cos vaiabes o om ou ynamic, baance pane aase.

4 The main iicuy in ou esimaions ies in ieniying he inepenen eecs o inena an exena acos on ening; i.e., o bans en moe in a speciic couny because he boowes have songe baance shees o because he bans cos o uning is owe? To answe his quesion, we oow a unique ieniicaion saegy, mae possibe ony by he biaea imension o ou aase. Since we can obseve a ening couny s (o is bans ) oans in he ohe 1 counies, we ae abe o measue he couny-speciic oan gowh aes eaive o he aveage goba oan gowh ae. Maching his vaiabe wih he baance shee sengh measues o he ecipien counies hen aows us o cono o any suppy sie acos ha may aciiae o impee ening an ieniy he inepenen eecs o a couny s baance shees (inena acos) on he amoun o goba oans she eceives. We evese his mehooogy o ieniy he eecs o exena acos (cos o uning), an measue he couny-speciic oan gowh aes in a given couny eaive o he aveage oan gowh ae in ha couny. By oing so, we cono o eman sie (inena) acos since goba bans en in he same couny. Hee we shou menion wo aspecs o ou mehooogy. Fis, when measuing he oan gowh aes in eviaiona om, we impiciy assume ha suppy sie (ene-speciic) esicions appy symmeicay o a boowes. Ahough bans can possiby ace ieen suppy sie esicions in ieen counies, he usua inings o he inena capia maes ieaue inicae ohewise; bans use hei inena maes eecivey o aocae uns acoss hei subsiiaies an hus ace simia esicions when ening in ieen counies. Secon, given ha ban eve aa on couny-speciic oans ae no avaiabe, o he bes o ou nowege, we use couny eve aa. Whie his cou poeniay mas he ieen ban eve sensiiviies o he wo acos, we in ha he baning secos ae, in genea, highy concenae in ou sampe counies an a ew age goba bans accoun o mos o he oans. See o exampe, Houson e a. (1997), Campeo (00), Ceoei an Gobeg (01) an De Haas an Leyveb (010). 3

5 Ou esus inicae ha goba ban oans ae posiivey eae o he sengh o boowe baance shees an negaivey eae o he bans cos o uning. In ohe wos, counies wih eaivey owe unempoymen aes an highe gowh aes eceive moe oans an bans ha ace owe boowing coss expan hei ening by moe. We in ha hese eaionships ae economicay impoan an obus o aenaive measues o baance shee sengh an uning coss. To compae he wo acos, we sanaize he baance shee an cos o uning vaiabes so ha hey have a mean o zeo an a sana eviaion o one. The esimaion esus evea a cea ispaiy beween he wo acos an inicae ha he cos o uning, he exena aco, is a moe impoan eeminan o goba ban oans. As we menione, a he same ime ha bans wee becoming moe goba, hey wee aso gowing in size an causing eeioaion in compeiive conuc. Ahough i is unceain whehe he wo eveopmens ae eae, mos economiss wou agee ha bans wou behave ieeny in maes wih ieen egees o compeiion. In an aenaive se o egessions, we heeoe invesigae how he egee o compeiion in he ecipien counies is eae o he sensiiviies o baance shee sengh an uning coss. Hee, we aso invesigae how oeign ban pesence (hei shae in oa oans) is eae o hese sensiiviies. Ou esus inicae ha when hee is ess compeiion in baning, boh ses o sensiiviies ae smae in magniue; hee is moe sabiiy in exena uning when bans ae age. Foeign pesence egessions evea a simia miigaing eec; as oeign ban pesence inceases exena oans become moe sabe. We in ha boh o hese eecs ae economicay impoan. 5 In he secon ha o he pape, we bui a simpe moe popuae by oveapping geneaions (OLG) o ieniy he mechanisms ha eemine goba bans sensiiviies o 5 Fo exampe, accoing o ou esus i Iay s oeign ban asses o GDP aio (aveage o.1 pecen) wee o each he eve o Denma (6.3 pecen), he sensiiviy o he baseine baance shee an cos o capia measues wou ecease by 50 an 3 pecen, especivey. We in an even age eec on he sensiiviies in ou esimaions wih compeiion.

6 inena an exena shocs an invesigae he oe o compeiion an oeign ban pesence. In he moe we incue omesic an oeign bans, each goup oming a Couno oigopoy, an incopoae boowe baance shees by oowing he invesmen-capia convesion amewo in Ceoei an Peeo (01). In his amewo invesmen is inance by ban oans an i can be successuy convee o capia wih ony a ceain pobabiiy; hee is eau ohewise. This icion heps us geneae baance shee (eau pobabiiy) shocs an anayze he eacion o oeign bans in a saighowa way. Exena shocs ae he changes in oeign bans uning coss an he eau pobabiiy o anohe couny ha aecs oeign bans eveage. The moe s symmeic Nash equiibium eveas sevea esus. As expece, oeign bans en moe when hei uning coss ae owe an omesic baance shees impove. The moe insighu esus ae eae o he ineacion o bans. In paicua, he wo ypes o bans inuence each ohe hough hei eecs on he euns om ening an uning coss; highe omesic (oeign) ban ening causes a ecease in he magina euns an an incease in he magina coss o oeign (omesic) bans. We in a weae ineacion when ban pois ae moe sensiive o shocs. I, o exampe, oeign bans euns, eaive o omesic bans, incease subsaniay in esponse o a ecease in eau pobabiiy an hei coss o no, hey en moe no ony because hey ace age poi magins bu aso because omesic bans have a smae negaive impac on hei pois. The ispaiy beween he sensiiviies o exena an inena shocs hus epens on he shocs iec impac on oeign bans pois an hei impac hough omesic bans. I, o exampe, a eau shoc pomps a eaivey age omesic ban esponse, oeign bans sensiiviy o uning coss can be age. Invesigaing he oe o compeiion, we in ha bans ispay highe sensiiviy when hey ae age in numbe an hus moe compeiive. The eason is ha hese eaivey sma 5

7 bans each iminishing magina euns an inceasing magina coss ess quicy han hey wou i hey wee age. The eec o compeiion on oeign ening sensiiviy is, howeve, no saighowa an i epens asymmeicay on he eve o compeiion amongs oeign an omesic bans. I oeign bans ae moe compeiive, hei sensiiviy o boh exena an inena shocs is highe. I omesic bans ae moe compeiive, oeign sensiiviies ae owe. The ae eec is ue o he miigaing impac ha a highe omesic ban esponse has on oeign ban ening. Tuning o oeign ban pesence, we in ha wih a age shae o oeign bans, he miigaing eecs o omesic bans ae smae an hus oeign ening is moe sensiive. Hee, a compaison o hese heoeica ineences wih ou empiica esus, ecommens a moe nuance an eaie appoach o suying he impac o compeiion an oeign ban pesence on oeign ening sabiiy. Speciicay, a owe egee o compeiion bings moe sabiiy ony i i is obseve among oeign bans an i oeign ban pesence is ow. Convesey, highe oeign ban pesence bings sabiiy, as suggese by ou empiica inings, ony i oeign an omesic bans ae ess an moe compeiive, especivey. Ou pape is eae o sevea sans o ieaue. Sepaaing he eecs o suppy an eman sie acos on ban ening empiicay is, o exampe, a nooious pobem in he cei channe ieaue o moneay economics, is menione by Benane an Gee (1995). Given his iicuy, suies ypicay ocus on eihe suppy sie (e.g. Kashyap an Sein, 000) o eman sie acos (e.g., Ashca an Campeo, 007; Apana an Aysun, 01; Aysun an Hepp, 011, 013) an mosy invesigae he ansmission o U.S. moneay poicy. A common ining is ha whie suppy sie acos have ecine in impoance ue o inancia innovaion an he gowing size o bans, eman sie acos (i.e., boowe baance shees) ae si an impoan conui o moneay poicy. Ou mehooogy aows us o no ony measue 6

8 he eecs o he wo acos bu aso o compae hem. Ou coss-couny anaysis inicaes ha suppy sie acos ae he pimay eeminan o ening. Thus whie he eec o suppy sie acos may be ecining in he U.S., hey may si be impoan gobay. Ou pape is moe iecy eae o he ieaue on he eaionship beween business cyces an oeign ban ening. In his ieaue, he evience o he impoance o exena an inena acos o oeign ening is mixe. On he one han, suies such as Buch (000), Dah e a. (00), De Haas an Van Leyve (006), Gobeg (00), Henanez an Ruoph (1995), Jeanneau an Micu (00), Mainez Peia e a. (00) an Mogan an Sahan (00) in ha bans esabiize economies by shiing uns om economies wih wea baance shees o hose wih song baance shees. This mechanism, eee o as he subsiuion eec in De Haas an Van Leyve (010), is consisen wih he usua ining ha oeign bans exen oans wih shoe mauiy an o ess house-ban/eaionship ening which maes hem moe sensiive o boowe baance shees. On he ohe han, suies such as Ceoei an Gobeg (01), Cysa e a. (00), Dages e a. (000), an Pee an Rosengen (000) in ha goba bans hep hei subsiiaies acoss he wo hough hei inena capia maes o equae euns. This mechanism, eee o as he suppo eec, avos suppy sie acos as he pimay eeminans o ban ows. In his pape, we in ha he suppo eec is moe impoan an oeign ban oans ae moe sabe when hey have a highe pesence in he boowing couny an hey ae no oo compeiive. Given he cucia oe ha goba bans paye uing he cisis, ecen suies have incue hei baance shees an he icions hey ace ino open economy moes o impove hei peomance (e.g. Davis, 010; Gee an Kaai, 011; Komann, 013; Komann e a., 011; Meh an Moan, 010). These enichmens have aowe o a moe 7

9 accuae epesenaion o inenaiona business cyces an have geneae he much neee coss-couny oupu coeaion hese moes wee acing wih he symmeic eecs o goba bans on he counies ha hey en o (e.g. Apana an Aysun, 01). Ou esus ae consisen wih his ieaue an impy ha a highe equency o goba inancia shocs (exena shocs) can incease oupu coeaion an aign business cyces aoun he wo. Tuning o he ieaue on compeiion an inancia sabiiy we in ha i is simiay ivie. Whie heoeica inings an evience om a moe compehensive se o counies sugges ha ess compeiion can bing moe sabiiy (Aen an Gae, 000, 00; Boo an Thao, 1993; Heman e a., 000; Keeey, 1990; Macus, 198), hee is consieabe evience suggesing ohewise (e.g. Boy an De Nicoo, 005; Johnson an Kwa, 010). In his pape, we mae a isincion beween he compeiion among oeign an omesic bans, especivey, an in ha hey can have opposie eecs on inancia sabiiy. We uhe concue ha he eecs o compeiion ciicay epen on oeign ban pesence an ha a moe nuance appoach is waane. This concusion is suppoe by he inings o Angine e a. (01) an Caessens an Van Hoen (01). Whie he ome suy ins ha he ac o compeiion ony becomes esabiizing in counies wih owe oeign ban pesence, he ae ins ha he wo may be eae; hee may be moe compeiion wih age oeign bans. The es o he pape is oganize as oows. Secion iscusses ou aa, mehooogy an esus. Secion 3 escibes he moe an iscusses he ineences. Secion concues.. Empiica evience In his secion we is escibe he mehooogy ha heps us ieniy he unique eecs o inena an exena acos on oeign ening. We hen escibe ou aase an pesen ou esus. In oing so, we assess he impoance o compeiion an oeign ban pesence. 8

10 .1. Loca baance shees an goba ban oans We begin by invesigaing he eaionship beween he sengh o a couny s baance shees (he eman sie o he cei mae) an he goba ban ows she eceives. In oing so, we cono o he suppy sie by measuing he oan gowh ae an he baance shee sengh vaiabes as eviaions om he ene-speciic aveages. Speciicay, e ij an bs i enoe he gowh ae o oans ha couny i s bans mae in couny j an hei aveage coss-couny oan gowh ae a ime, hen he epenen vaiabe, he eaive oan gowh ae ~ bs ij, is given by, ~ bs ij ij bs i (1) Simiay he main inepenen vaiabe, he eaive sengh o oca baance shees, y~ ij, is measue as he ieence beween he oupu gowh ae in couny j, y ij, an he aveage oupu gowh ae acoss a he counies ha couny i s bans en in, y i, so ha ~ y ij y ij y i () Ae consucing he main vaiabes, we incue hem in he oowing moe: ~ bs ij bs 1 ~ bs bs ij 1 ~ y bs ij 1 bs bs ij bs ij (3) whee bs ij is a veco o ene-speciic cono vaiabes ha hep us accoun o any esiua suppy sie eecs on he bans abiiy o en. Hee, we oow he common paameeizaion an incue ou ags o boh he epenen an inepenen vaiabes on he igh han sie (e.g., Ashca an Campeo, 007; Ceoei an Gobeg, 01; Kashyap an Sein, 000). Since bans suppy sie esicions, as menione above, appy simiay acoss a he counies ha hey en in, we can ocus on he eman sie, i.e., he iiosyncaic ucuaions in he cei wohiness o boowes, by consucing he vaiabes in eviaiona om. A simpe 9

11 hough expeimen hee can uhe caiy ou ieniicaion. Assume, o exampe, ha he cos o obaining oanabe uns o Begian bans inceases. This can eihe be a shoc common o evey couny o speciic o Begium. Assume aso ha he Geman economy is gowing consieaby ase han a he ohe economies ha Begian bans en in. Then, by measuing boh he oans ha Gemany eceives om Begium an he economy s gowh ae eaive o he ohe economies ha Begian bans en in, we ae abe o ieniy he eec o Geman baance shee sengh on he ban oan inows inepenen o he incease in Begian bans uning coss. Ahough his mehooogy aows us o cono o suppy sie acos, we acnowege ha boowe cei wohiness is no he ony eman sie eeminan o goba oans. Thee ae ohe ecipien-couny-speciic, ime-vaian an ime-invaian, acos (such as he quaiy o insiuions) ha can poeniay miigae o ampiy he wihawa om o ows ino hese counies when bans ace suppy sie shocs. To hone in on he ynamic eecs o boowe baance shees, we expess he main vaiabes in og ieences o eiminae ime invaian eecs an we use he mos compehensive measues ha eec baance shee sengh; i.e., he GDP gowh ae an unempoymen ae. We aso consie hee acos ha ae ess voaie ye iecy eae o ban behavio (compeiion, ening shae an oeign ban pesence)... Bans cos o uning an goba ban oans We pocee by econiguing ou moe o invesigae he eaionship beween bans cos o capia an hei goba ening behavio. The chaenge in his secion, convesey, is o cono o he ecipien counies baance shees when measuing he eec o suppy sie acos on he goba ban oans ha hey eceive. To coninue wih he hough expeimen above, assume now ha amongs a he bans ha en o Gemany, Begian bans ae he ones 10

12 ha ace he ages incease in he cos o obaining oanabe uns. To ieniy he unique eecs o his uning shoc on he amoun o Begian ening in Gemany, we cou hen measue boh he gowh ae o Begian oans in Gemany an he Begian bans cos o capia eaive o hei aveage vaues measue acoss a he goba bans ha en in Gemany an quaniy he eaionship beween he wo vaiabes. By oing so, we wou be conoing o eman sie acos (Geman baance shees) when measuing he impac o suppy shocs. To conuc his anaysis, we econsuc ou vaiabes as oows: Le j enoe he aveage gowh ae o a goba oans in couny j, hen he eaive gowh ae o couny i s oans, ~ ij, is given by ~ ij ij j () Simiay, e bij an b j enoe he cos o uning o couny i s bans an he aveage cos o uning acoss a he goba bans ha en in couny j, especivey. Then he eaive cos o capia o couny i s bans, b ~ ij, is consuce as ~ b ij b ij b j (5) We incue hese wo vaiabes in he oowing moe, ~ ij 1 ~ ij 1 ~ b ij 1 cs j ij (6) whee he main ocus is on he coeiciens o b ~ ij an a veco o boowe speciic vaiabes, cs j, is incue o accoun o he esiua eman sie eecs ha ae no shu o..3. Daa In his secion, we escibe ou aase, epo vaious escipive saisics, an iscuss ou esimaion mehooogy. The aa einiions an souces ae povie in Appenix A. 11

13 We obain ou aa mainy om wo souces: he Ban o Inenaiona Seemens (BIS) Locaiona Baning Saisics an he FRED aabase o he Feea Reseve Ban o S. Louis. The coss-couny oan aa ae om he BIS aabase an hey ae avaiabe ae 198 o 6 epoing counies. We esic ou aase o incue quaey obsevaions beween 000Q1 o 01Q. We choose he yea 000 as ou cuo poin since pio o his yea he aa ae epoe semi-annuay an hee ae many missing obsevaions; we uhe esic ou aase o 15 counies ha have no missing obsevaions. The counies in ou baance pane aase (Ausia, Begium, Canaa, Swizean, Gemany, Denma, Spain, Fance, Unie Kingom, Iay, Japan, Neheans, Pouga, Sween, Unie Saes) ae aso he age economies in he wo, an hey accoun o an ovewheming shae o he oans in he BIS aabase. The oans ae in miions o U.S. oas, posiive o each boowe-ene pai an epesen BIS epoing bans ousaning amoun o exena oans vis-à-vis a secos (Tabe 7A). 6 To consuc he epenen vaiabe in equaion (3), we measue, o each ening (epoing) couny, he gowh ae o he oans in each o he 1 ohe counies an he aveage vaue o hese gowh aes. We hen compue he eaive oan gowh ae as he ieence beween he boowe speciic an he aveage oan gowh ae. To consuc he epenen vaiabe in equaion (6), we measue, o each boowing couny his ime, he gowh ae o he oans exene by he ohe 1 counies an he aveage vaue o hese oan gowh aes. We hen simiay measue he eaive oan gowh ae as he ieence beween he wo vaiabes. One avanage o ou mehooogy is ha i aows us o aw ineences om a eaivey age pane aa se (especiay since he aa ae a he couny eve) ha incues appoximaey 9,000 obsevaions (10 couny pais an 7 quaes) o each egession. 6 We use he oans o a secos since oans o he non-inancia secos wee no avaiabe vis-à-vis iniviua counies. 1

14 The emaining aa ae om he FRED aabase. 7 Fom seasonay ajuse aa we compue he quaey ea GDP gowh ae an he quaey change in he hamonize unempoymen ae o obain ou baseine inicaos o boowes baance shee sengh. We capue he bans uning coss by hei oca 3-monh an -hou ineban aes an eposi aes. We aso incue ohe measues o uning coss an vaious ban baance shee an income saemen aios o chec he sensiiviy o ou esus. The inepenen vaiabes hee ae simiay measue as eviaions om aveages. In equaions (3) an (6) we use he enes an he boowes ea GDP gowh aes an he change in hei 3-monh ineban inees aes as cono vaiabes, especivey, o accoun o he esiua ene an boowe speciic eecs. Besies is eaivey age size, ou aase accouns o an impoan shae o he oans o he counies in ou sampe. In Pane A o Tabe 1 we iusae his eaue o ou aase by epoing he aio o he BIS oan inows an ouows o he oa amoun o oca pivae cei (in U.S. oas). The aveage aios (compue om 000 o 01) ae geneay age an emonsae a consieabe amoun o vaiaion boh acoss ime (he sana eviaion o he aios acoss he sampe peio) an acoss counies. 8 As expece, we obseve ha some counies ae ne enes an he ohes ae ne boowes uing he sampe peio. The 3-ban an 5-ban concenaion aios ae he shae o he op 3 an 5 bans asses in hei oca baning seco, especivey. Noice ha o a majoiy o he counies hese aios ae above 50 pecen an emonsae a consieabe amoun o vaiaion acoss counies (o exampe, he 3-ban concenaion is 7.6 pecen o he U.S. an 9.5 pecen o Sween). Beow, we expoe whehe his vaiaion impacs he goba bans ening ecisions. The nex ow, in Pane A inicaes a signiican oeign ban pesence in he sampe counies. Consisen 7 The aa ha we obaine om FRED ae compie om OECD an IMF saisics. 8 The aios can be geae han 100 pecen since he oca cei vaiabe incues ony pivae oans. 13

15 wih he aios in he is wo ows, he oa amoun o ousaning oeign oans o GDP aios ae ceainy no negigibe. The nex wo vaiabes show ha oeign bans ae ew in numbe an hey ae age (oeign bans asses o omesic bans asses aios ae geae han 100 pecen o some counies). We shou eieae ha impoance o he ae obsevaion o ou pape. Since we o no have ban-eve aa on couny speciic ening, ou esimaions may mas he ieen sensiiviies ha bans exhibi an ea o miseaing ineences. Since he coss-couny oans in ou sampe ae mosy mae by a vey ew age bans, howeve, i is ess iey o a ban o behave ieeny wihou impacing couny-eve sensiiviies. The sucua baning vaiabes in he as ou ows o pane A simiay evea a signiican egee o vaiaion acoss counies (o bans chaee by he counies). The ieence beween he cei/eposi aio o Japan an Sween, o exampe, is ove 100 pecen, an whie Sweish bans eun on equiy was 17. pecen, Japanese bans incue osses. The cei/eposi aios aso show ha eposis ae an impoan souce o uning. In ou anaysis, we hus incue he eposi inees ae as an aenaive inicao o uning coss. In ou pane moe esimaions we consie he ime seies an coss seciona vaiaion in coss-couny ening. This anaysis wou no be inomaive i he ening, baance shee, an uning cos vaiabes behave simiay acoss ime an counies. In pane B o Tabe 1 we epo he ime seies an coss seciona vaiaion o ou ey vaiabes. The sana eviaions o boh imensions ae age an oen geae han he mean vaues hus emonsaing a consieabe amoun o vaiaion in ou pane aase. Beow, we uiize his vaiaion o measue an compae he sensiiviies o goba ban ening o he sengh o baance shees an uning coss. 1

16 To esimae equaions (3) an (6) we use he Genea Meho o Momens saegy o Aeano an Bon (1991). We use his meho since i is esigne o ynamic pane moes ha, simia o ous, have a age coss-seciona imension. The mehooogy aso accouns o he unobseve pane-eve ixe/anom eecs, enogeneiy o he inepenen vaiabes, nonsaionaiy o he epenen vaiabe an heps us obain heeoseasiciy-consisen sana eos. In ou esimaions we use he -1 ae inepenen vaiabes as insumens... Resus We epo ou esimaion esus in Tabe. The cena esu hee is ha goba ban oan ows ae posiivey an signiicany eae o he sengh o oca baance shees an negaivey an signiicany eae o he bans uning coss. The posiive (negaive) vaue o he GDP gowh ae (he unempoymen ae) coeicien, epoe in he is ow, impy ha i a couny s GDP inceases (unempoymen ae eceases) moe han he ohe counies in he sampe, she eceives moe oans. On he suppy sie, he negaive coeiciens o he 3-monh an -hou ineban, an eposi aes, aso epoe in he is ow, impy ha i a couny s bans ace highe coss o aising oanabe uns eaive o bans chaee by ohe counies, hey wihaw hei oans a a highe ae. In aiion o hese hee couny-speciic inees aes, we use he aveage aes o he 57 bans mos acivey boowing euos. 9 The esus in he as coumn show ha hese aes ae aso negaivey eae o goba ban ening. The coeiciens o he cono vaiabes (GDP gowh aes an 3-monh ineban aes) ae in genea insigniican, suggesing ha measuing he main vaiabes in eviaiona om is aowing us o eecivey cono o ene an boowe speciic eecs in esimaing equaion (3) an (6), especivey. When we o no measue he vaiabes in eviaiona om, as in he euo ae egessions, we in ha boowe speciic eecs ae signiican. Fo a ou 9 Since he euo ae is no couny-speciic, we measue he oan gowh ae in eves when incuing his ae in ou egessions. 15

17 egessions, iagnosic ess suppo he vaiiy o he insumens (capue by he Sagan es saisic) an o no evea any evience o secon oe seia coeaion in he eo em...1. Compaing he sensiiviy coeiciens In aiion o being saisicay signiican, he sensiiviy coeiciens in Tabe ae aso no negigibe economicay. To uncove he economic impoance o he GDP gowh coeicien in Tabe, o exampe, e s assume ha Begium expeiences a one pecen gowh ae in he pas ou quaes an ha he emaining economies o no gow. The aggegae coeicien vaue o 0.3 hen impies ha goba ban oans in Begium gow 0.3 pecenage poins moe (quaey) han he aveage gowh ae o oans o a counies. Given ha he aveage quaey oan gowh ae in ou sampe is 1.37 pecen, his impies ha he oans in Begium incease appoximaey 16 pecen moe han he aveage ae acoss a counies (5 pecen on an annua basis). A simia hough execise eveas a age economic impac o uning coss. Assume ha among he counies ening o Begium, Canaa is he ony one ha expeiences a one pecen incease in he ineban boowing aes in he pas quaes. Then he coeicien vaue o impies ha Canaa s oan gowh ae in Begium is pecenage poins owe han Begium s aveage oan inow ae, which is 1.37 pecen o he whoe sampe. In ohe wos, whie he aveage couny inceases he oans o Begium by 1.37 pecen, Canaa eceases he oans by 0.9 pecen. Fo he meian economy in ou sampe (Spain, in ems o GDP), 1.87 an 0.3 pecen o he BIS oans coespon o appoximaey 0.19 an 0.0 pecen o quaey GDP. 10 Noice ha ahough he esus so a poin o a age suppy sie eec, he compaison can be miseaing i he inicaos o baance shee sengh an uning coss have ieen means/unis an voaiiies. Speciicay, he coeicien vaue o he inicao wih a highe 10 We use GDP by expeniue in consan pices (005 Doas) an oa BIS oans o an om Spain in ou cacuaions. 16

18 mean an sana eviaion wou be smae. 11 To coec o his poenia bias, we sanaize a he inicaos so ha hey a have a mean o zeo an a sana eviaion o one an esimae ou moes by using hese sanaize vaiabes. The coeicien vaues epoe in he is ow o Tabe 3, by consucion, epesen he oan gowh esponse o a one sana eviaion change in he baance shee an uning cos vaiabes. These esus evea ha he sensiiviy o uning coss is highe compae o he sensiiviy o boowes baance shees. The magniue o he esponse o a one sana eviaion change in he boowes eaive GDP gowh ae an he enes 3-monh ineban boowing ae, o exampe, ae 0.10 an 0.33 pecen, especivey. The same ispaiy is obseve when we use he unempoymen ae an he ohe inees ae vaiabes. The cos o uning is, o couse, no he ony inicao o suppy sie consains. Thee ae ohe chaaceisics o bans such as hei iabiiy sucue, iquiiy, an poiabiiy ha cou aec hei abiiy o en. We use cos o uning in ou baseine anaysis because i was he ony measue ha was avaiabe a a quaey equency o a he counies in ou sampe. A moe compehensive se o measues is avaiabe a he annua equency in he aabase ha we use. As a nex sep, we es whehe suppy sie consains, when capue by aenaive vaiabes, simiay have a age impac on goba ban oans compae o eman sie acos. To mae his compaison, we consuc he annua vaiabes as in Secion.3 an hen sanaize hem as expaine above. The esimae vaues o he ey coeiciens ae epoe in Tabe. 1 In ou moe we use wo ags o he baance shee vaiabes an he numbe in paenhesis ae he F-saisics ha inicae join signiicance. The esus, hough mixe, geneay sugges he pesence o a simia ispaiy beween he sensiiviy coeiciens. The 11 Since we measue GDP gowh in og ieences an inees ae change in pecenages, he unis ae aso ieen. 1 We excue he cono vaiabes coeiciens om Tabe o beviy an since hey wee insigniican. 17

19 baning vaiabes coeiciens, hough no aways signiican, ae consieaby age. In aiion o he inees ae vaiabes (in annua equency), we use he eun on equiy, ne inees magin, an he cos o income aios as inicaos o poiabiiy, an wo aios ha measue iquiiy an eveage (iqui-asses-o-sho-em-iabiiies an capia-o-asses aios). The signs o he signiican coeiciens inicae ha bans en moe when hey ae moe poiabe an eveage. On he baance shee sie, we use he oca nonpeoming-oans-ooa-oans aio an he GDP gowh aes (no eaive o he ohe counies) as aiiona inicaos o baance shee sengh. Ahough he coeiciens o hese vaiabes simiay inicae a posiive eaionship beween baance shee sengh an oan inows, hey oo ae sma in magniue compae o he suppy sie coeiciens an hey ae insigniican.... The eec o compeiion an oeign pesence We pocee by invesigaing hee poenia eeminans o he ening sensiiviies esimae above. Fis, we invesigae he oe o ban compeiion in he boowing counies an as whehe goba bans become moe o ess sensiive o he sengh o baance shees an hei uning coss when hey ace moe/ess compeiion. Secon, we incue couny-speciic ening shaes o eemine whehe counies wih a age shae o he ecipien couny s oan mae exhibi highe o owe sensiiviy o eman an suppy sie vaiabes. We conuc a simia expeimen as a hi sep an es whehe boowing counies wih a highe goba ban pesence (highe goba ban oans o GDP aio) ace highe ening sensiiviy. To incopoae compeiion ino ou anaysis o baance shee eecs, we ineac ieen measues o compeiion wih ou baance shee vaiabes, an incue he ineacion em in ou moe as oows: ~ bs ij bs 1 ~ bs bs ij 1 ~ y bs ij 1 ~ y bs ij comp ~ j5 1 bs bs ij bs ij (7) 18

20 We oow he same mehooogy o exen ou anaysis o he suppy sie eecs: ~ ij 1 ~ ij 1 ~ b ij 1 ~ b ij comp ~ j5 1 cs j ij (8) In equaions (7) an (8), he vaiabe co mp ~ j measues he egee o compeiion in he baning inusy o boowing couny j an evey ohe vaiabe in he wo equaions is consuce simiay (we oow he baseine mehooogy an o no sanaize he vaiabes). Ou baseine compeiion measue, he 3-ban concenaion aio, measues he shae o he hee ages bans asses in oa commecia baning asses an i is avaiabe a he annua equency. By consucion, heeoe, an incease in co mp ~ j impies uhe concenaion an a eeioaion in compeiive conuc. We measue his vaiabe aso in eviaiona om so ha i epesens a couny s eve o compeiion eaive o he aveage eve acoss a he counies. Since his vaiabe is avaiabe a he annua equency, we ineac he quaey baance shee an uning cos vaiabes wih he eve o compeiion obseve in he pevious yea. The esus in Tabe 5 sugges a posiive eaionship beween he egee o compeiion an he sensiiviy o baance shees an uning coss. In paicua, i he op 3 bans in he size isibuion o a couny ae subsaniay age han he ohe bans, goba ban oans in his couny become ess sensiive o oca boowes baance shees an goba bans uning coss. Compaing he wo sies, we obseve a songe eaionship on he eman sie. The ineacion em coeicien in he is coumn, o exampe, impies ha he sensiiviy o GDP gowh aes eceases by appoximaey one-hi when he concenaion aio inceases by one pecenage poin. The.7 pecenage poin ecease in he sensiiviy o unempoymen ae, abei smae, is age compae o he uning cos measues. The coesponing vaues ae 1., 1.3, an 1.1 pecenage poins o he 3-monh an -hou ineban aes, an he eposi ae, especivey. 19

21 We obain simia esus when we use he 5-ban concenaion aio an he Lene inex as aenaive measues o compeiion. The Lene inex is a maup base measue wih highe vaues impying a owe egee o compeiion. The esus in Tabe 6 sugges ha he sensiiviies o boh acos ae owe when hee is ess compeiion. The ineacion em coeiciens simiay inicae a age op in he sensiiviy o boowe baance shees, hough, noice ha he GDP coeiciens ae insigniican when we use he Lene inex. Nex, we epace he compeiion vaiabe in equaions (7) an (8) wih he shae o he ening counies oans in he oa BIS oans mae in he boowing counies. We measue his aio quaey an ineac i wih he baance shee an uning cos vaiabes in he same quae. The esimaion esus ae epoe in he op pane o Tabe 7. Unie he esus in Tabe 6, he eec o ening shae is no uniieciona. Whie bans/counies wih a highe shae in he boowes oan mae ae moe sensiive o hei uning coss, hey ae ess sensiive o he boowes baance shees. We shou poin ou, howeve, ha he eman sie coeiciens ae no age. Fo exampe, he ineacion em coeicien vaue o , impies ha i a ene s shae inceases by 100 pecenage poins, he sensiiviy o he boowe s eaive GDP gowh ae eceases by ony 6. pecen. A simia obsevaion can be mae o he unempoymen ae (a 6.1 pecen ecease). On he suppy sie, he esus ae mixe. Whie he sensiiviy o he 3-monh an hou ineban aes incease by 6.9 an.7 pecen, especivey, when he ene s shae inceases by 100 pecenage poins, he sensiiviy o eposi aes inceases by ony 1.8 pecen. We in a age impac on he enes sensiiviy when we epace he couny-speciic ening shae vaiabe wih an inicao o oeign bans pesence in he boowes oan mae. We capue oeign ban pesence wih he oa oans (amoun ousaning) by nonesien 0

22 bans o boowe s GDP aio. This aio, simia o he compeiion vaiabes, is avaiabe ony a he annua equency. Theeoe, he esimaion mehooogy is he same as he one we use o he compeiion egessions. The esus ae ispaye in he boom pane o Tabe 7. The cena esu is ha wih highe (owe) goba ban pesence, sensiiviy o boh he eman an suppy sie vaiabes is owe (highe). Compae o he couny-speciic ening shae egessions, he size o he coeiciens is age. Fo exampe, i he goba ban oans o GDP aio inceases by ony 1 pecenage poin, sensiiviy o GDP gowh aes an he 3-monh ineban aes eceases by.1 an 1. pecen, especivey. These numbes impy ha i Iay s goba ban oans o GDP aio (wih a sampe aveage o.1 pecen) wee o each he eve o Denma (6.3 pecen), o exampe, he sensiiviy o GDP gowh an 3-monh ineban aes wou ecease by appoximaey 50 an 3 pecen, especivey, o Iay. 3. Ineences om a simpe moe So a, we uncovee a ispaiy beween he sensiiviy o goba ban ening o boowe baance shees an o uning coss an oun ha a highe egee o baning compeiion an oeign ban pesence in he boowing counies have a miigaing eec on he sensiiviies. In his secion, we invesigae mechanisms ha may expain hese empiica esus by buiing an soving a moe o goba ban ening. The ocus o his secion is simiay on he eacion o goba bans o oca baance shee an uning cos shocs The consumes an he poucion pocess The economy is epesene by a -peio OLG moe. The young agens in he moe ae enowe wih a uni o abo an hey o no own capia. Thei abo suppy is ineasic (equa o one) an he shae o hei abo income ha is no consume in peio 1 inances hei peio consumpion, when hey ae o. O agens o no wo. In each goup, he numbe o 1

23 agens is inie an consan an he agens ae ienica. The maximizaion pobem o a epesenaive agen in his economy in peio is hen given by, max (, ) s u c c 1 c c 1 (9) c w s (10) c 1 s (11) whee c, w, s an enoe he amoun o consumpion, abo income, savings an he ae o eun on savings, especivey, an is he powe uncion paamee ha is ess han Subsiuing equaions (10) an (11) ino he uiiy uncion an maximizing wih espec o he amoun o savings yies he oowing savings suppy coniion: 1 s (1) w s whee he young agens equie a highe eposi ae o save moe. The abo sevices o he young agens, h, ae hie by a epesenaive, compeiive im ha combines abo wih capia,, o pouce he ina oupu accoing o he sana neocassica uncion, y h (13) 1 Given ha h 1, he wage ae (abo income), w, an euns o capia,, can be eive om he maximizaion pobem o he im as, w 1 (1) 1 (15) 3.. The enepeneus an he inancia mae 13 We oow Ceoei an Peeo (01) by seing he iscoun aco o 1 an by using a powe uncion o seamine he exposiion. We each simia concusions wih a iscoun aco ess han 1 an a moe sana uncion.

24 The young agens in he economy ae aso he enepeneus. They boow om he inancia mae, conve hei oans ino capia an hen suppy his capia o a compeiive im. The inancia mae consiss o a inie an consan numbe o omesic an oeign/goba bans ( n omesic an n oeign) so ha hee is no eny o exi. Heeae, we ee o he ae as oeign bans o simpiy he exposiion, ahough, i shou be noe ha oeign bans opeae/en gobay in ou moe. In channeing uns o he enepeneus, boh ypes o bans ace icions. Speciicay, a uni o cei can be convee o a uni o capia wih pobabiiy. The convesion is unsuccessu wih pobabiiy 1 an he bans canno ecove any o hei oans. This cei shoc is i.i. acoss he enepeneus so ha j, j j whee j, j an j epesen he amoun o capia, he iiosyncaic cei shoc, an he amoun o oans o enepeneu j. The ims ae inieen o omesic an oeign ban oans as ong as hey ace he same ening ae an capia is ivisibe so ha boh ypes o bans en o he enie popuaion an ivesiy he enepeneu-speciic cei is. I is impoan o noe hee ha he paamee is anaogous o he boowe baance shee sengh in he empiica secion. I boowes have songe baance shees, hey ae ess ie o eau on hei oans an is high. We pocee by escibing he bans opimizaion pobem an expaining how he wo ypes o bans ae ieen. A his poin, howeve, we shou menion ha he bans in he economy ae Couno compeios. Each ban (omesic an oeign), heeoe, simuaneousy chooses is amoun o oans, an when i oes, i nows he oa amoun o ening by he ohe bans. We choose o use Couno compeiion because i aows us o consie he enie specum o compeiive pacices in a saighowa way; by changing he numbe o bans om 1 o, we can capue any egee o compeiion om monopoy o peec compeiion. 3

25 3..1. Domesic bans Domesic bans ae owne by he omesic saves, i.e. geneaion -1 young agens (geneaion o agens), an he savings inance he capia expeniue o geneaion young agens (he enepeneus). The ban ownes anse hei owneship o he nex geneaion young agens when hey ie an hey maximize nex peio s pois. Hee, we assume ha he ban ownes coec baning pois an ha hei eun is epesene by boh he eun on equiy (pois pus he change in he pice o equiy) an he eposi ae as hee is peec abiage beween he wo. Le e n an ij enoe he numbe o enepeneus an omesic ban i s oans o enepeneu j, hen he poi maximizaion pobem o ban i is given by, max ij e n 1 ij ij j1 s.. (16) (17) (18) w whee an epesen he oa amoun o omesic an oeign ban ening, especivey an he oa capia soc in he economy is given by equaion (17). Soving he pobem an aggegaing ove he enepeneus yies he oowing opimaiy coniion: 1 i (19) whee e n i j1 ij an. 1 Accoing o equaion (19), he maup ha omesic bans appy on hei oans epens on he pobabiiy o success,, an he eec o hei oans 1 To simpiy noaion, we omi he supescip om he eivaive o he euns o capia on he igh han sie since he eivaives wih espec o omesic ban an oa oans ae ienica. We o he same o oeign oans. Noice aso ha since he euns o capia expession is inea in enepeneu-speciic oans, he aggegaion ove he enepeneus is saighowa.

26 on he eposi ae an he aggegae euns o capia. The wege beween he ening an he eposi ae inceases when hee is a highe pobabiiy o eau an when ban i s oans subsaniay incease he eposi ae an ecease he euns o capia, especivey Foeign bans Foeign bans obain a o hei uning om ousie o he boowing couny an simiay use hese uns o inance enepeneus capia expeniues. 15 Each oeign ban ens gobay an has posiions in c n counies. In choosing hei couny-speciic maups, he oeign bans ae ino accoun he amoun o ening by he ohe bans in he ecipien couny an hei oans in ohe counies. Le ijm an i enoe oeign ban i s oans o enepeneu j in couny m an is uning ae, especivey, hen is pois, i, can be epesene by, n c n e m 1 mm ijm i ijm (0) i m1 j1 whee m inexes he counies an n e m enoes he numbe o enepeneus in couny m. In maximizing pois, oeign bans ace consains ha ae simia o hose ace by omesic bans. As in equaion (17) he amoun o capia in couny m is he sum o oa oeign an omesic ban oans ( m an m m m m m ) ha ae successuy convee o capia so ha, (1) Unie equaion (18), howeve, he uning coss o oeign bans o no iecy epen on he amoun o omesic savings. These bans obain uning om a ansnaiona capia mae whee boowing aes epen on inancia eveage: 15 I is possibe o aw simia concusions om ou moe i oeign bans aso accep omesic eposis in aiion o aising uns exenay. This assumpion, howeve, geneaes vey compicae opimaiy coniions an consieaby conouns he anaysis. To mae he moe moe acabe, we hus assume ha he oeign bans aise a o hei uning exenay. 5

27 i whee w w n c n m1 j1 m1 j1 e m n c m n e m ijm 1 m ijm is a goba, is ee ae. In he ieaue, he wege beween an () w is usuay geneae by an iiosyncaic ne woh shoc ha can cause bans o eau. 16 To simpiy he anaysis, we assume ha he boowing pemium uncion is inea in eveage. 17 The omuaion in equaion () aows o a eaisic epesenaion o inenaiona shoc ansmission. Speciicay, a shoc o couny m s economy aecs he ohe economies as we an since he poi uncion is sepaabe an capia canno be ansee acoss counies, he ansmission in ou moe opeaes hough oeign bans uning aes. Foeign ban i s poi maximizaion yies he oowing paicipaion coniion in couny m (ae aggegaing ove enepeneus): m 1 m i i m m m im (3) 3.3. Sensiiviy o inena shocs In his secion, we eive he sensiiviy o oeign bans oans in a given couny o he eau pobabiiy ( 1 ) o is boowes. We appoach his secion om he pespecive o a boowing couny. The euns o capia in equaions (19) an (3) ae, hus, ienica an he m subscips can be oppe. We uhe simpiy noaion by opping he ime subscip. To eive he sensiiviy o eau pobabiiy, we begin by ieeniaing he opimaiy coniions in equaions (19) an (3) wih espec o, an. In hese equaions, we 16 Since we o no aemp o cose he moe o aw quaniaive ineences, he eivaion o equaion () is no ciica o ou anaysis. One can, abei, conceive a se o is neua goba invesos who poo hei uns an en o bans. These invesos can be ew in numbe an hus hei consumpion cou be vey sma an negigibe compae o oa consumpion. 17 In moes wih cei icions, boowing speas ae usuay eive om he opimizaion pobem o he ene an he unciona oms ae oen compicae (e.g., Benane e a., 1999). Hee, we simpiy he anaysis by using a inea om. 6

28 7 impose symmey acoss omesic an oeign bans so ha i n, i n, i. The ieeniaions o equaions (19) an (3) yie he oowing wo coniions, especivey: 3 1 () 3 1 (5) whee he coeiciens 1,, 3, 1,, 3 ae given by, n ,, n 3 3, 1 1, n 1 1, n 3 3, an epesens he secon oe ems in he expessions. 18 We assume ha hese secon oe ems ae eaivey sma o simpiy he exposiion. Beoe we pocee, i is convenien a his poin o povie an inepeaion o he coeiciens above. These coeiciens have symmeic impicaions o omesic an oeign bans pois an oans. 3 an 3, boh posiive, measue he eec o on oeign an omesic bans pois om a uni o oans, especivey. In esponse o an incease in (a ecease in he pobabiiy o eau), he bans euns incease no ony because he highe pecenage o successu invesmen pojecs inceases he amoun o capia an hus he euns om capia bu aso because he bans ecove a highe shae o hei oans. On he cos o 18 1 n, n, n 3 1 n, n, n 3

29 uning sie, an incease in pomps a ecease in eposi aes since i aecs wages an he amoun o savings posiivey. A simia negaive eec is obseve o oeign bans since a highe vaue o eceases eveage by inceasing evenues. The as em in he expessions o 3 an 3 epesen he ecease in euns cause by aiiona ening. These negaive eecs ae age when is age an he numbe o bans is sma. The ae obsevaion is ciica o ou anaysis o compeiion an i impies ha as he numbe o bans incease, each ban has a smae impac on he poiabiiy o he pojec. Lening ecisions in maes wih ieen egees o compeiion ae heeoe mae une ieen cicumsances. The coeiciens 1 an capue he magina impac o omesic an oeign bans ening on hei coss. Boh coeiciens ae posiive an as bans en moe, hei coss incease o wo easons: They have o oe highe eposi aes o aac he necessay uning an hei magina euns om he pojec ecease wih each aiiona uni o ening. These eecs ae songe when he mae is ess compeiive since wih ewe bans aiiona oans have a moe subsania eec on bans uning coss an hei euns om he pojec. The o-iagona coeiciens 1 an capue he magina impacs o omesic an oeign ban ening on oeign an omesic bans pois, especivey. The coss-ban ansmission opeaes simiay hough uning coss an magina euns. As omesic ban oans incease, o exampe, oeign bans euns om he pojec ecease, hey become moe eveage an ace highe uning coss ( 1 0 ). By conas, when oeign ban oans incease, omesic bans uning coss (eposi aes) ecease since wages ae highe. Bu omesic bans euns simiay ecease. Fo easonabe vaues, he ome eec ominaes ( 0 ) is negaive i /. This coniion hos o any posiive vaue o eposi aes an oans. 8

30 We obain he symmeic equiibium by equaing he euns om an aiiona uni o ening o he coss incue as in equaions () an (5). The sensiiviy o oeign ban ening o omesic eau shocs can hen be sove o om hese equaions as (6) Fis, noice ha i he ening ecisions o oeign an omesic bans wee ome inepeneny (i hey wee in segmene maes), he secon ems in he numeao an he enominao wou equa zeo. The sensiiviy o oeign ening o eau shocs wou hen be highe, o exampe, i a ecease in eau pobabiiy subsaniay incease he euns ne o uning coss, (i.e., i 3 was age), an he incemena amoun o ening i no cause a age op in he ne magina euns (i.e., i was sma). Wih a posiive enominao, he secon em in he numeao impies ha he omesic bans eacion o he eau shoc has a miigaing eec on oeign bans sensiiviy. I his eec is age enough, oeign ban ening an he sengh o oca baance shees (epesene by ) can even be negaivey eae. Domesic bans have a geae impac on oeign bans eau sensiiviy when hei ening has a age eec on oeign bans uning coss an magina euns om he pojec ( 1 is high), when he sensiiviy o hei ne euns o eau shocs is age eaive o he sensiiviy o hei euns o he amoun o ening ( / 3 1 is high) an when oeign bans eec on hei magina cos o ening (boh in ems o euns an uning coss) is sma compae o hei eecs on hei own coss ( / 1 is ow). To summaize, oeign bans become moe sensiive o he sengh o omesic baance shees i hei euns, ne o uning coss, ae moe sensiive o he pobabiiy o eau an 9

31 ess sensiive o he aiiona amoun o ening compae o omesic bans. In ohe wos, i oeign bans have moe o gain an ess o ose when hee is a posiive baance shee shoc, hei esponse is age in magniue (opposie concusions ae awn o an avese shoc). This moe esponse epens on he mae shae o omesic bans. Fo exampe, i omesic bans aso expec a subsania incease in pois ae a op in eau pobabiiy, an i hei oans consiue a age shae o he mae, he sensiiviy o oeign bans wou be smae. The eason is ha an incease in omesic ban oans, combine wih hei age shae, wou cause he economy o each iminishing euns quicy an hine oeign ban ening. To unesan he eaionship beween compeiion an oeign ban ening, we sepaaey consie he eecs o n an n. Lowe n, o ess compeiion amongs oeign bans, impies a smae 3 an a age an a owe sensiiviy o boowe baance shees. The eason is ha when oeign bans ae smae in numbe, an age in size, hei oans have a bigge impac on he euns o capia an hei cos o uning. Thus any posiive impac o a op in eau pobabiiy, o exampe, wou eoe away ase when hee ae a ew age oeign bans. Convesey, a owe n (ow 3 an a high 1 ) wou impy highe oeign sensiiviy. The mechanism is simia. Domesic bans, when sma in numbe, o no incease hei oans signiicany when eau pobabiiy is owe since hey ace iminishing euns an high uning coss moe quicy. This aows oeign bans o exen a age amoun o oans. Ovea, he eec o compeiion on oeign ening is no saighowa an i epens asymmeicay on he eve o compeiion amongs oeign an omesic bans. 3.. Sensiiviy o exena shocs We pocee by measuing he sensiiviy o oeign ening o wo ypes o exena shocs: An exogenous change in oeign inees aes,, an a change in he eau 30

32 pobabiiy o anohe couny. The ome can be inepee as a goba iquiiy shoc (o a change in w ) ha maes i easie o hae o goba bans o aise oanabe uns. In esponse o he ae shoc, invesmen becomes moe (ess) poiabe in anohe couny an oeign bans incease (ecease) hei ening in a given couny even i he sengh o he baance shees emains unchange. We assume ha he shoc o aecs evey oeign ban symmeicay an ha i oes no aec omesic bans eposi aes. Dieeniaing equaions (19) an (3) wih espec o, an, an soving o he sensiiviy o oeign ening yies he oowing expession: 1 (7) 1 1 whee 1,, 1 an have he same einiions. Noice is ha an incease in oeign inees aes, as expece, pomps a ecease in ening. Since oeign inees aes ae no iecy eae o he euns om he pojec, he size o he sensiiviy coeicien epens on how much he change in ening aecs pois. Fo exampe, i he negaive ening esponse o a posiive inees ae shoc geneaes a subsania incease (ecease) in he oeign bans euns (coss), o i is age, hen is ampiue wou be smae. The magniue o he sensiiviy, simiay, epens negaivey on he eec o omesic bans on oeign ban poiabiiy ( 1 ) an he eaive impac o oeign bans on he omesic bans magina cos o ening (he / aio). 1 When we invesigae he eecs o a eau shoc in a ieen couny, we in a simia expession o he sensiiviy o exena shocs, 31