Estimating the impact of exchange rate changes on the asset growth of multinational banks

Abstract

The article develops an empirical model to explain how changes in exchange rates have affected the growth of total assets of a sample of the world's largest banks over the 17-year period of 1972–1989. The model was estimated over a period in which U.S. banks' assets grew less rapidly than the assets of large banks headquartered in other industrial countries. The model provides an estimate of the banks' allocation between home currency and foreign currency assets, which allows a calculation of the estimated impact of exchange rate changes on bank asset growth. The results of the model suggest that no single economic variable explains the faster growth of non-U.S. banks. Changes in real exchange rates were estimated to have had a significant but not overwhelming impact on bank asset growth through their impact on the dollar value of banks' home-currency assets. Other factors, such as faster home-country economic growth, an expanding trade and foreign investment sector, and the ability of large banks to retain their share of domestic intermediation, were also important factors in determining relative rates of bank asset growth.