Three essays on Global bank branches

This thesis consists of three essays on the branches of global banks, which are the basic units of the global banking system and have significant implications for the financial stability of each country. To date, the branches of global banks have not received much attention in the literature. However, when we focus on their distinctive characteristics and linkages with local banks, it leads us to important narratives about cross-border capital flows, financial stability, and macroprudential policy. The first essay begins by paying attention to the expansion of the role of global bank branches, and the relationship and differences between local banks and global bank branches. Then, I estimate the determinants of cross-border capital flows through domestic banks and global bank branches, respectively, by using country-level data from the BIS and bank-level data from The Bankers. The results reveal the difference between the domestic banks channel and the global bank branches channel in the determinants of cross-border borrowing, thus highlighting the need to introduce these two channels separately in models dealing with crossborder capital flows. I also examined the factors driving the cross-border flow of the US dollar through intragroup (interoffice) transactions of each global bank group. It shows that the capital adequacy and the density of risky assets of domestic banks affect the size of cross border loans in US dollars for global banks to their branches located in those countries. The second essay highlights the growing significance of global bank branches in the context of financial stability and analyzes the potential risks each local economy may face due to cross-border capital flows driven by global banks. Motivated by empirical evidence in the first essay and further enriched with intuition, I propose a small open economy DSGE model which to the best of my knowledge is the first to distinguish between ‘domestic banks’ and ‘global bank branches’. These banks have distinctive features but are intimately connected through currency swaps since global bank branches seek exchange rate risk-less arbitrage in each local economy. My model predicts that global bank branches can amplify the effect of a financial shock, a sudden deterioration in domestic banks’ soundness, by exacerbating the liquidity crunch. This effect is amplified in countries with higher dependence on global bank branches, and I show that countries become more dependent on global bank branches when global banks expand assets. Importantly, the central bank’s monetary policy and conventional credit market intervention are insufficient to assure financial stability in this situation. These findings provide a rationale for introducing or strengthening policies to alleviate financial anxiety arising from global bank branches. In the third essay, to counter the systemic vulnerabilities arising from global bank branches I devise two macroprudential policies and demonstrate their significant effect on economic stability. One is the regulation on global bank branches, hence easing the procyclicality of capital flows. The other is regulation on domestic banks, hence inducing them to curb excessive dependence on swap funds from global bank branches. My simulation results using our extended model show that the former is a more efficient mechanism to mitigate the spread of financial shocks related to global or domestic banks. But given the local government’s limitation of control over global banks, the latter policy could be a more viable alternative helping to avoid a massive liquidity crunch. Based on the central bank’s loss function, which includes both macroeconomic stability and financial stability obligations, using both macroprudential policies together results in fewer losses than using only one or no macroprudential policy