nep-ifn New Economics Papers
on International Finance
Issue of 2021‒08‒30
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Global Banking and Firm Financing: A Double Adverse Selection Channel of International Transmission By Leslie Sheng Shen
  2. Global lending conditions and international coordination of financial regulation policies By Enisse Kharroubi

  1. By: Leslie Sheng Shen
    Abstract: This paper proposes a "double adverse selection channel" of international transmission. It shows, theoretically and empirically, that financial systems with both global and local banks exhibit double adverse selection in credit allocation across firms. Global (local) banks have a comparative advantage in extracting information on global (local) risk, and this double information asymmetry creates a segmented credit market where each bank lends to the worst firms in terms of the unobserved risk factor. Given a bank funding (e.g., monetary policy) shock, double adverse selection affects firm financing at the extensive and price margins, generating spillover and amplification effects across countries.
    Keywords: Adverse selection; Global banking; Information asymmetry; International transmission; Monetary policy
    JEL: G21 F30
    Date: 2021–08–10
    URL: http://d.repec.org/n?u=RePEc:fip:fedgif:1325&r=
  2. By: Enisse Kharroubi
    Abstract: Using a model of strategic interactions between two countries, I investigate the gains to international coordination of financial regulation policies, and how these gains depend on global lending conditions. When global lending conditions are determined non-cooperatively, I show that coordinating regulatory policies leads to a Pareto improvement relative to the case of no cooperation. In the non-cooperative equilibrium, one region - the core - determines global lending conditions, leaving the other region - the periphery - in a sub-optimal situation. The periphery then tightens regulatory policy to reduce the cost of sub-optimal lending conditions. Yet, in doing so, it fails to internalise a cross-border externality: tightening regulatory policy in one region limits ex ante borrowing in the other region, which increases the cost of sub-optimal lending conditions for the periphery. The equilibrium with cooperative regulatory policies can then improve on this outcome as both regions take into account the cross-border externality and allow for larger ex ante borrowing, ending in a lower cost of suboptimal lending conditions for the periphery.
    Keywords: regulatory policy, global financial conditions, international coordination
    JEL: D53 D62 F38 F42 G18
    Date: 2021–08
    URL: http://d.repec.org/n?u=RePEc:bis:biswps:962&r=

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