Cross-border Effects Research Articles

The Relevance of Currency-Denomination for the Cross-Border Effects of Monetary Policy

We analyze how a change in ECB monetary policy affects lending of internationally active banks, depending on whether the currency of the claim is the one of the counterparty country, using Spanish individual bank data. We analyse the transmission from an outward perspective, exploring how banks adjust their foreign lending denominated in local and in foreign currency to changes in monetary policy, both cross-border and also through their affiliates located in other countries. We find that non-bank private claims in local currency respond much less to the ECB monetary policy stance than claims in foreign currency. We also find that the spillover effects on cross-border lending denominated in foreign currency depend on banks’ characteristics. When we broaden the analysis to include claims to the public and the financial sector, the transmission of monetary policy is mainly through foreign currency loans, but bank heterogeneity plays a role in the transmission to local currency loans. In general, a tightening of the ECB monetary policy results in an increase in lending abroad. Exchange rate changes only affect foreign currency-denominated lending.

The Impact of Business and Political News on the GCC Stock Markets

This paper investigates the impact of business and political news on stock market returns in the Gulf Cooperation Council (GCC) countries. For this purpose, it employs a Markov switching model including a separate index for each of the two categories of news considered. The results indicate the importance of news as drivers of GCC stock returns, with business news playing a more substantial role; further, news released in the largest financial markets in the regions are found to have significant cross-border effects.

‘Whatever it takes’ and the role of Eurozone news

ABSTRACTThis letter shows that the ‘Whatever it takes’ speech by ECB President Draghi on 26 July 2012 and the ensuing installation of the Outright Monetary Transactions’ framework are associated with a reduction in the domestic and cross-border effect of Eurozone news on absolute yield changes in Eurozone sovereign debt. These results are consistent with the popular view that these actions helped to avoid a collapse of the Eurozone.

Cross-Border Effects of Regulatory Spillovers: Evidence from Mexico

I study the spillover of a macroprudential regulation in Spain to the Mexican financial system via Mexican subsidiaries of Spanish banks. The spillover caused a drop in the supply of household credit in Mexico. Municipalities with a higher exposure to Spanish subsidiaries experienced a larger contraction in household credit. These localized contractions caused a drop in macroeconomic activity in the local non-tradable sector. Estimates of the elasticity of loan-demand by the non-tradable sector to changes in household credit supply range from 1.6–3.5. These results emphasize the potential for cross-border effects of regulations in the presence of global banks.

Do European bidders pay more in cross-border than in domestic acquisitions? New evidence from Continental Europe and the UK

In this paper, we investigate whether European mergers and acquisitions (M&A) create more value to target than bidding firm shareholders, and why bidders pay larger premiums in cross-border than in domestic acquisitions. Using a sample of 275 intra-European public acquisitions initiated between 2003 and 2010, we find target firm shareholders to earn significantly positive bid premiums in both domestic and cross-border acquisitions. However, these premiums are substantially greater, approximately 8% greater, in cross-border than in domestic acquisitions. When the method of payment is considered, the bid premiums are found to be much larger for stock than cash offers. Our empirical results are in line with those for the US takeover market. Previous M&A literature reports that the difference in bid premiums between cross-border and domestic acquisitions can be explained by variations in corporate governance structures. Our analysis of the European takeover market shows that the cross-border effect in target bid premiums is decreasing with the increased quality of corporate governance/investor protection in the bidding firm. However, no evidence exists that this effect is more pronounced in deals completed with stock. Finally, we provide new arguments in support of the hypothesis that there is significant difference in abnormal returns to targets and bidders depending on their location − Continental Europe or the UK/Ireland.

Cross-border agglomeration benefits

Spatial correlations exist for many economic phenomena. We also know such interactions are typically weaker across country borders than within countries, due to institutional, infrastructural or cultural factors. However, in spatial econometric analyses, the effect of borders is rarely taken into account, and all borders between regions are treated as equal. We distinguish between different types of borders by splitting our weight matrix in two, and creating separate lags for within-country and cross-border effects. We demonstrate the effectiveness of this method in an analysis of average productivity in a region for several manufacturing sectors. Without implying causality, we relate this productivity to average productivity in surrounding regions as well as to agglomeration externalities both in its own region and in surrounding regions. We find border effects are indeed quite present: spatial lags within the country are invariably different from those across borders.

Cross-border spill-overs from fiscal stimulus in a monetary union

We analyse domestic and cross-border effects of fiscal policy in a two-region business cycle model of a monetary union. Without relying on debt consolidation via spending reversals along the lines of Corsetti, Meier and Mueller (2010) and Corsetti and Mueller (2014) we show that a fiscal expansion by the core economies of the euro area is associated with crowding in of both core and periphery consumption. Interestingly, cross-border spill-over effects are larger the larger the share of credit constrained households in the periphery.

The “statutist trap” and subject-matter jurisdiction

Common law courts frequently rely on statutory interpretation to determine the cross-border effect of legislation. When faced with a statutory claim that has foreign elements, courts seek to determine the territorial scope of the statute as a matter of Parliamentary intent, even if it is clear that Parliament did not give any thought to the matter. In an article published in this journal in 2012, Christopher Bisping argued that “statutism” – the idea that statutory interpretation should determine whether a statute applies to foreign facts – is inconsistent with established principles of choice of law. The purpose of this paper is to demonstrate that, in addition to cutting across principles of choice of law, a statutist approach has the potential to obscure fundamental questions of subject-matter jurisdiction. In particular, statutism can lead to conflation of subject-matter jurisdiction and choice of law, and it impedes the development of coherent principles of subject-matter jurisdiction.

Subsidiarity in Directive 2014/104 EU on Damages Actions for Breach of EU Competition Law

The article is concerned with subsidiarity in Directive 2014/104 EU on actions for antitrust damages. After providing an overview of private enforcement of competition law and subsidiarity in EU law, it examines the arguments presented by the Commission in the relevant Impact Assessments. While most of the arguments were based on the need to prevent adverse cross-border effects, of particular interest was the argument that Member States were slow or unresponsive in providing effective measures designed to compensate antitrust victims. Subsequently, it shows that the Commission’s assessment of the underlying problems was discretionary and played a pivotal role before the considerations on subsidiarity were made. On this basis, this article makes the case for subsidiarity to be understood as Member States’ constructive engagement in EU action, rather than constraint on EU action.

Cross-border effects of capacity mechanisms in interconnected power systems

The cross-border effects of a capacity market and a strategic reserve in interconnected electricity markets are modeled using an agent-based modeling methodology. Both capacity mechanisms improve the security of supply and reduce consumer costs. Our results indicate that interconnections do not affect the effectiveness of a capacity market, while a strategic reserve is affected negatively. The neighboring zone may free ride on the security of supply provided by the zone implementing a capacity mechanism. However, a capacity market causes crowding out of generators in the energy-only zone. A strategic reserve implemented by this region could aid in mitigating this risk.

UNFCCC Nationally Determined Contributions: Climate Change and Trade

Even though the Paris Agreement does not include any trade-related provisions, trade has the potential to play a major role in the implementation of the response measures enshrined by the Parties in their Nationally Determined Contributions (NDCs), while creating opportunities for many countries to achieve changes in the structure of their economies. Accordingly, this study seeks to achieve a better understanding of the impacts of the actual response measures contained in the NDCs on economic diversification, including their interactions with existing trade rules, in order to build mutual supportiveness between the climate and trade regimes while also contributing to broader sustainable development objectives. The analysis is conducted in three parts. First, the study seeks to identify all the response measures contained in the INDCs/NDCs that appear to interact with existing trade rules. Second, the study investigates the potential of the response measures identified in the INDCs/NDCs to have domestic and cross-border effects on economic diversification. Third, the study examines the role of Free Trade Agreements (FTAs) in supporting such a potential through the incorporation of climate-related measures in the international trading system.

Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?

Using firm-level data for approximately 1,000 bank and nonbank financial institutions in 22 countries over the past 15 years we study the impact of prolonged monetary policy easing on risk-taking behavior. We find that the leverage ratio, as well as other measures of firm-level vulnerability, increases for banks and nonbanks as domestic monetary policy easing persists. Cross-border effects are also notable. We find effects of roughly similar magnitude on foreign financial sector firms when the U.S. eases policy. Results appear robust to a variety of specifications, and to be non-linear, with risk-taking behavior rising most quickly at the onset of monetary policy easing.

Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?

Using firm-level data for approximately 1,000 bank and nonbank financial institutions in 22 countries over the past 15 years we study the impact of prolonged monetary policy easing on risk-taking behavior. We find that the leverage ratio, as well as other measures of firm-level vulnerability, increases for banks and nonbanks as domestic monetary policy easing persists. Cross-border effects are also notable. We find effects of roughly similar magnitude on foreign financial sector firms when the U.S. eases policy. Results appear robust to a variety of specifications, and to be non-linear, with risk-taking behavior rising most quickly at the onset of monetary policy easing.

News and sovereign CDS markets: evidence from the Euro area

The purpose of this paper is to trace the impact of news announcements on sovereign five-year credit default swaps (CDS) spreads of four distressed countries in the euro area (Ireland, Italy, Portugal, and Spain) with daily data spanning the period May 17, 2012 to May 23, 2014. We apply an analysis based on asymmetric conditional volatility modelling methodology. The empirical analysis provides interesting evidences. The paper finds that the influence of country-specific news variable on the dynamics of the sovereign CDS spreads was confirmed. Moreover, when considering that news originated only from distressed countries, the domestic and cross-border effects of news are restricted to unfavourable news. In particular, we find that more bad news in one country leads to an increase in its own CDS spreads and those associated with other countries confirming thus the presence of a news spillover phenomenon. In contrast, we make evidence of the spillovers of good news from the non-distressed countries onto the other countries. Clearly, the sovereign CDS markets' responses indicate that the split into bad and good news has largely been done correctly.

How credit ratings affect sovereign credit risk: Cross-border evidence in Latin American emerging markets

This article builds upon previous literature by providing a better understanding of how contagion changes in bordering sovereign CDS emerging markets resulting from credit rating events. To that end, we follow the novel GVAR methodology using data from six Latin American emerging countries during an extensive sample period from 2004 to 2014. Our findings show evidence for the existence of significant and asymmetric cross-border effects. In particular, a competition effect is observed before the event occurs, indicating that non-event countries suffer (benefit) from upgrades (downgrades) in Brazil, Mexico and Chile (in Argentina and Brazil). In contrast, an imitation effect is observed after rating upgrades in Chile, to the benefit of bordering non-event countries.

Fiscal policy in Europe: The importance of making it predictable

This paper provides evidence in support of the hypothesis that fiscal policy is largely anticipated and its effects depend on the extent to which policy is able to affect expectations. Based on a set of 2-country Bayesian VAR models between major European economies, we find that a surprise stimulus triggers expectations of deficit reversals that may crowd out private expenditure. An anticipated stimulus, on the contrary, is found to boost domestic activity in all samples. Moreover, it has positive cross-border effects in 50 percent of the cases. Overall, our findings suggest that fiscal policy is effective when it is not “crowded out” by expectations of reversals. We document such crowding out effects in Italy and France. Finally, we argue that predictability has important consequences for the design of discretionary policy.

Terror attacks and stock-market fluctuations: evidence based on a nonparametric causality-in-quantiles test for the G7 countries

We use a novel nonparametric causality-in-quantiles test to study the effects of terror attacks on stock-market returns and volatility in G7 countries. We also use the novel test to study the international repercussions of terror attacks. Test results show that terror attacks often have significant effects on returns, whereas the effect on volatility is significant only for Japan and the UK for several quantiles above the median. The effects on returns in many cases become stronger in terms of significance for the upper and lower quantiles of the conditional distribution of stock-market returns. As for international repercussions, we find that terror attacks mainly affect the tails of the conditional distribution of stock-market returns. We find no evidence of a significant cross-border effects of terror attacks on stock-market volatility, where again Japan and the UK are exceptions as far as terror attacks on the US are concerned. Finally, our results continue to hold following various robustness checks involving model structure, lag-lengths and possible omitted variable bias.

International Banking and Cross-Border Effects of Regulation: Lessons from the Netherlands

The large and concentrated international activities of Dutch banks make the Netherlands particularly relevant for assessing the outward transmission of prudential policies. Analysis of the quarterly international claims of 25 Dutch banks in 63 countries over 2000-2013 indicates that Dutch banks increase lending in countries that tighten prudential regulation. This result is driven particularly by larger banks; banks with higher deposit ratios; by lending to advanced economies; and by lending in the post-crisis period. The result is not significant in most other sub-samples. These findings suggest that banks react to changes in local prudential regulation via foreign lending – which could come either from regulatory arbitrage, or from signaling effects of prudential policy on country risk. This contributes to the case for the reciprocation of macroprudential policy.

International Banking and Cross-Border Effects of Regulation: Lessons from France

As part of the International Banking Research Network, the Banque de France contribution to the research project on prudential policy spillovers concentrates on the “outward” adjustment of French banks’ cross-border lending. We consider both adjustment of cross-border lending to foreign (“destination country”) as well as French (“home country”) regulation and investigate differences between financial and non-financial counterparties. For some regulatory measures, we find that French banks increase their cross-border lending growth in response to regulatory tightening abroad – presumably because they are not subject to these regulatory changes. All in all, we do not find particularly large quantitative adjustments to changes in foreign regulatory policies. Lastly, we find that balance sheet variables are important for the adjustment of cross-border lending growth in response to French regulatory policy changes.

International Banking and Cross-Border Effects of Regulation: Lessons from the United States

Domestic prudential regulation can have unintended effects across borders and may be less effective in an environment where banks operate globally. Using U.S. micro-banking data for the first quarter of 2000 through the third quarter of 2013, this study shows that some regulatory changes indeed spill over. First, a foreign country's tightening of limits on loan-to-value ratios and local currency reserve requirements increase lending growth in the United States through the U.S. branches and subsidiaries of foreign banks. Second, foreign tightening of capital requirements shifts lending by U.S. global banks away from the country where the tightening occurs to the United States and to other countries. Third, tighter U.S. capital regulation reduces lending by large U.S. global banks to foreign residents.