The impact of fiscal rules on cross-border bank claims

Abstract

Over the last 15 years, cross-border bank claims have become an important source of international liquidity, as well as a channel for cross-country risk propagation. Consequently, their drivers are an extensively studied theme in the literature. In this paper, I point to an important determinant of cross-border lending that has so far been missing from the literature – namely, fiscal rules. I utilize the bilateral data on cross-border bank lending to developing countries and show that fiscal rules have opposing effects on private and public sector claims, but overall they decrease foreign bank lending. This conclusion has important policy implications – it shows that the implementation of fiscal rules may limit developing countries' access to cross-border financing.