What is the Major Determinant of Credit Flows through Cross-Border Banking?

March 19, 2013
Toyoichiro Shirota^*1

Abstract

This paper examines the major determinant of the cross-border credit flows from global banks toward 70 vis-á-vis countries in seven regions of the world. Employing a Bayesian dynamic latent factor model, we decompose the volatilities of banking flows into the contribution of the global-common factor, the regional-common factor, and the national-specific factor. The results indicate that the global-common factor explains 36.4 percent of volatilities in overall cross-border banking flow, suggesting that the international propagations of shocks through global banks are quantitatively important. Especially, the contribution of the global-common factor is increasing in the 2000s. At the same time, main determinants are largely heterogeneous across countries. This heterogeneity implies that the desirable policy response to credit inflows could be different for each host country.

JEL Classifications
C11, F3

Keywords
International Capital Flows; Dynamic Latent Factor; Bayesian Estimation

The author would like to thank Shuhei Aoki, Michael Fischer, Ichiro Fukunaga, Hirotaka Hideshima, Hibiki Ichiue, Shun Kobayashi, Kazuo Monma, Koji Nakamura, Ko Nakayama, Kanako Saeki, Hidehiko Sogano, and Kenichiro Watanabe for comments and suggestions. The views expressed herein are those of the author and do not reflect those of the Bank of Japan.

*1 Financial Markets Department
E-mail : toyoichirou.shirota@boj.or.jp

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