Global Banks' Spillovers to Emerging Markets: Macro to Micro Transmission

Overview

This paper investigates the transmission of global banks' net worth shocks to emerging market economies (EMEs). It uses high-frequency data to show how these shocks affect local currencies, borrowing costs, and capital flows.

Key Insights

• Currency Appreciation: Positive shocks to global banks' net worth lead to local currency appreciation.
  • Evidence: Based on high-frequency surprises to banks' credit supply capacity.
  • Verifiable: Yes
• Borrowing Costs and Capital Flows: These shocks lower external borrowing costs and increase capital flows to domestic banking sectors.
  • Evidence: Administrative credit-registry data from Uruguay.
  • Verifiable: Yes
• Investment and Credit Growth: There is an increase in investment, credit, and real activity across EMEs.
  • Evidence: Robust across various specifications and samples.
  • Verifiable: Yes
• Firm-Level Impact: More leveraged firms, especially those with foreign-currency debt, experience weaker responses.
  • Evidence: Firm-level data analysis.
  • Verifiable: Yes

Why It Matters

Understanding these spillovers is crucial for managing financial stability in EMEs, particularly in banking and corporate sectors.

Actionable Implications

• Monitor global banks' net worth changes to anticipate currency and capital flow impacts.
• Develop strategies to mitigate risks for highly leveraged firms with foreign-currency exposure.
• Enhance regulatory frameworks to manage spillover effects more effectively.