Cross‐border bank flows through foreign branches and the effect of a macroprudential policy

Abstract

AbstractGlobal banks play an important role in the international transmission of shocks by allocating funds across the world through their foreign affiliates. Using monthly data on individual foreign bank branches in Korea from 2004 to 2018, this paper investigates how global banks propagate shocks and examines the effect of one particular macroprudential measure that was introduced to reduce the volatility of cross‐border bank flows. I find that foreign bank branches actively adjust their borrowing from headquarters by responding to changes in interest rates and the covered interest parity deviations. An important underlying heterogeneity is revealed: branches with high shares of loans in their balance sheets are more sensitive to interest rate changes, while branches with high bond shares respond more to the covered interest parity deviation. The macroprudential policy restricting the foreign exchange derivative positions of banks to be less than certain multiples of the long‐term capital does make the branches capitalize more by borrowing over the long term from parent banks, but the policy mostly affects the bond‐type branches and has no effect on total borrowing from the parent banks.