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on International Finance |
| By: | Fernando Avalos; Ramon Moreno; Tania Romero |
| Abstract: | This paper investigates the microeconomic determinants of leverage decisions by asset managers. Investment funds (the "buy side") have significantly increased their share of global capital flows in recent years. Unconventional monetary policies in advanced economies have squeezed returns while reducing borrowing costs, which in principle creates an incentive for asset managers to use more leverage. We start by studying the recent behaviour of fund leverage in different asset categories at an aggregate level. Leverage appears to have increased significantly in funds focused on the fixed income markets of emerging economies. Then we analyse the microeconomic factors that shape the leverage decision. In line with theory, we find that leverage rises with expected returns, and falls with market risk and borrowing costs. Transaction costs are also mentioned in the literature as another factor that should inhibit leverage. Lacking the requisite data, we introduce as proxies changes in capital controls and macroprudential policies, because they tend to affect expected returns in comparable ways. We find that tighter capital controls on inflows increase leverage rather than decrease it, but that macroprudential measures have no discernible effect. Finally, we discuss these results and their policy implications. |
| Keywords: | leverage, hedge funds/mutual funds, portfolio management, capital structure, capital controls, macroprudential measures |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:517&r=all |
| By: | Anton Korinek; Damiano Sandri |
| Abstract: | International capital flows can create significant financial instability in emerging economies because of pecuniary externalities associated with exchange rate movements. Does this make it optimal to impose capital controls or should policymakers rely on domestic macroprudential regulation? This paper presents a tractable model to show that it is desirable to employ both types of instruments: Macroprudential regulation reduces overborrowing, while capital controls increase the aggregate net worth of the economy as a whole by also stimulating savings. The two policy measures should be set higher the greater an economy's debt burden and the higher domestic inequality. In our baseline calibration based on the East Asian crisis countries, we find optimal capital controls and macroprudential regulation in the magnitude of 2 percent. In advanced countries where the risk of sharp exchange rate depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential to mitigate booms and busts in asset prices. |
| Keywords: | Capital controls;Macroprudential policies and financial stability;Emerging markets;East Asia;Exchange rate depreciation;Borrowing;Domestic savings;Financial crises;Econometric models;Financial stability, pecuniary externalities, capital controls, macroprudential regulation, inequality. |
| Date: | 2015–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/218&r=all |
| By: | Dong He (The International Monetary Fund); Eric Wong (Hong Kong Monetary Authority); Andrew Tsang (Hong Kong Monetary Authority); Kelvin Ho (Hong Kong Monetary Authority) |
| Abstract: | This paper presents a theoretical model in which the supply of international dollar credit by a global bank is responsive to unconventional monetary policies (UMPs) both in the US and its home country, the functioning of the FX swap market and the bank's default risk. The theoretical model is tested using two unique confidential datasets. The results suggest that the contractionary effect of US monetary normalisation on global liquidity would be partly offset by the expansionary effect of UMPs in Japan and the euro-area. However, a stress testing exercise shows that global liquidity would be seriously disrupted if normalisation of monetary policy in the US leads to financial market dislocation, in particular in the FX swap market. Finally, this study finds that global banks' risk-taking attitude, credit risk exposure, and the business model of their overseas offices are important factors affecting how dollar credit supplied by international banks would respond to UMPs. |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:192015&r=all |
| By: | Nasha Ananchotikul; Dulani Seneviratne |
| Abstract: | Given the heavy reliance on bank lending as the main source of financing in most Asian economies, banks could potentially play a pivotal role in monetary policy transmission. However, we find that Asia’s bank lending channel or, more broadly, credit channel of domestic monetary policy is not very strong at the aggregate level. Using bank-level data for nine Asian economies during 2000–2013, we show that heterogeneity of bank characteristics (e.g., ownership type, financial position), degree of foreign bank penetration of the domestic banking sector, and global financial conditions all have a bearing on the response of domestic credit to changes in domestic monetary policy, and may account for the apparently weak credit channel at aggregate level. |
| Keywords: | Monetary transmission mechanism;Asia;Emerging markets;Banks;Loans;Financial systems;Banking sector;Globalization;Monetary policy;Monetary policy transmission; bank lending channel; financial globalization |
| Date: | 2015–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/207&r=all |