Net Interoffice Accounts of Global Banks: The Role of Domestic Funding

Carmela D'Avino

doi:10.3390/ijfs3030177

Abstract

Existing literature has identified domestic restrictive monetary policy and deteriorating funding conditions as the predominant factors explaining the increase in net interoffice accounts of global banks, that is, the net liabilities of parent offices due to their related foreign offices. The purpose of this research is twofold. Firstly, it quantifies the responsiveness of net interoffice accounts to variations in different types of domestic funding. Secondly, the paper assesses whether the relationship between net interoffice accounts and domestic policy-steered rates depends on cross-sectional differences in the funding structure of global banks. Using US banks’ balance sheets data collected by the Federal Financial Institutions Examination Council, the results highlight the importance of domestic repo borrowings in explaining net interoffice accounts, especially for larger banks during the crisis. On the other hand, a negative relationship between policy rates and net interoffice accounts is observed only for those global banks with a relatively higher share of repo borrowings.

Highlights

The current dimension of international banking has no historical precedents
The results show that net interoffice accounts increase when global banks reduce their borrowings from both the private sector and repo markets
This paper contributes to further understanding the reasons why US banks borrow from their foreign offices

Summary

Introduction

The current dimension of international banking has no historical precedents. The great majority of large modern banking groups have an institutional structure that goes beyond national borders: global. This paper explores whether cross-sectional differences in funding through repurchase agreements of global banks result in heterogeneous responses of net interoffice positions to domestic monetary policy This analysis is motivated by the intention to clarify the puzzling behavior of US banks’ net interoffice accounts observed during the latest crisis. It presents the estimates of a dynamic panel regression in which net interoffice accounts are explained primarily by US global banks’ balance sheets’ funding variables. It reports the estimates of a threshold model aimed at assessing whether cross-sectional variations in funding structure result in different behavior of global banks vis-à-vis domestic monetary policy.

Stylized Facts on Net Interoffice Accounts in the US

Variables and Sample

Model Estimation I

Model Estimation II

Findings

Conclusions