Cross-border Loans Research Articles

Targeted Measures Against Intra-Group Debt Financing: What Needs and Design Options in Light of the ATAD, Transfer Pricing Rules, and Pillar 2?

This article explores the need for interest limitation rules targeting intra-group debt financing, together with certain design options. It is concluded that most issues related to intra-group debt financing are already covered by the anti-tax avoidance directive (ATAD), transfer pricing rules and the Pillar 2 reform. Only the debt/equity balance is not addressed by these rules. Therefore, thin capitalization rules appear to be the most motivated type of targeted rule, if such rules are to be adopted. Other types of targeted rules, such as those taking into account the level of taxation of the recipient or the intention to avoid tax are hardly justified in cases covered by the Pillar 2 reform. In addition, thin capitalization rules can be designed in a manner that does not distinguish between domestic and cross-border situations, hence raising fewer issues of compatibility with the EU fundamental freedoms than other types of targeted rules that rely on the difference in taxation between domestic and cross-border loan transactions. Interest limitation, thin capitalization, ATAD, transfer pricing, GloBE, Pillar 2, BEPS, EU law

Future of the Euromortgage conceptPart 1: Solutions in selected European countries

Since the 1960s, there has been discussion regarding the introduction of a flexible real estate pledge law in Europe that could serve to ensure security above all for cross-border loans. Although this issue is not currently undergoing detailed analysis, due to a number of significant changes in variousEuropean legislations, including in Polish law, anticipating new solutions in mortgage law, it is worth considering anew whether they and which ones might constitute a possible model for future security in rem in European Union law. The first section of the article outlines the historical background of solutions breaking with the Roman model of accessory pledge rights, and presents a few selected modern mortgage systems, in which there has been a significant departure from the principle of pendency of collateral security on real estate above all the German, Slovenia, Swiss, French, Estonian and Hungarian systems. Slovenian practice may be taken as an example of solutions that have not worked out in practice due to abuses related to the establishing of a non-accessory pledge right to the detriment of creditors seeking the satisfaction of other debts from the property of the owner of the encumbered property.

Cross-border credit networks, banking risk contagion and suppression effects

From the perspective of risk contagion, it is difficult to balance the benefits and costs of banking globalization. We use data on cross-border syndicated loans intended to build heterogeneous credit networks among banking sectors in various countries to explore the introduction of banking risks into the network. Via social network analysis (SNA), we find that the global credit network has phased characteristics, and it is a source of exposure to global banking risks. However, the more important network position, that is, the greater centrality, identified shows that the banking industry is more stable. To explain these findings, we present and estimate the banking risk contagion model and the suppression effect model of contagion. Evidence suggests that the international credit network is the channel of risk contagion, and the long-term loan network and nonfinancial borrower network have a stronger contagion effect. Exogenous banking supervision and network endogenous closeness centrality can inhibit risk contagion. From a policy perspective, these findings indicate the need to supervise high-risk cross-border loans and maintain independence in the international credit network. Data Availability StatementThe data that support the findings of this study are available from the corresponding author, [Heng Zhao, email: zhao0501@mail.dlut.edu.cn], upon reasonable request.

Banking Across Borders: Are Chinese Banks Different?

We explore the global footprint of Chinese banks and compare it with that of other bank nationalities. Chinese banks have become the largest cross-border creditors for almost half of all emerging market and developing economies (EMDEs). Their global reach resembles that of banks from advanced economies (AEs). We take a nationality approach as international banks, and Chinese banks in particular, grant a substantial share of their cross-border loans from affiliates located abroad. But differences remain. Using a gravity model with a novel measure of distance capturing the role of foreign affiliates across all bank nationalities, we find that larger distances deter crossborder bank lending to EMDEs more than to AEs. For Chinese banks, however, distance deters lending to EMDEs less than for peer EMDE banks. We show that for all banks combined, bilateral economic interactions like trade, FDI and portfolio investment, positively correlate with lending. Chinese banks' lending to EMDEs also strongly correlates with trade, but not with FDI and, unlike other banks, it correlates negatively with portfolio investment.

Climate policy and cross-border lending: evidence from the syndicated loan market

Do cross-country differences in climate policy influence bank lending? This paper focusses on the period 2007–2017 and uses syndicated loan-level data to examine if the stringency of home-country climate policies increases cross-border bank lending. Loan fixed effects allow us to disentangle loan demand from supply and to control for unobserved and observed loan and firm characteristics. I find evidence that a strict home-country climate policy is associated with an increase in banks’ cross-border loan shares. This suggests that the transition to a low-carbon economy might be threatened if global coordination between governments is not enforced.

German Federal Constitutional Court Strengthens Role of ECJ as Lawful Judge in German Cross-Border Tax Matters

The German Federal Court passed a verdict (IR 73/16) emphasizing the importance of ECJ case law for cases regarding cross-border transfer pricing issues. The decision regards a cross-border loan that was allegedly not at arm’s length due to the lack of sufficient collateral provided. The German Federal Court ruled that, in order to prevent eroding the ECJ’s importance, ECJ case law must be considered by national courts and that the ECJ must be consulted in situations where clear guidance or interpretation from the ECJ under the acte clair and acte éclairé doctrines is not available.

Rise of Domestic Banks in EME Cross-border Credit Intermediation

While the volume of cross-border capital inflow to emerging market economies (EMEs) has been increasing since 1970s, the last three decades have witnessed a more pronounced change in the structure of these cross-border capital flows. In this paper, we document the rise of domestic global banks in EMEs and the growingly important role they have played in channeling cross-border capital since the 1990s. We further provide evidence that this structural change in the cross-border capital flow to EMEs is likely to be driven by the transformation of the U.S. money market since the end of the 1980s. Using detailed documentation on cross-border loans, we demonstrate that foreign and domestic lenders have drastically different preferences on lending bases when extending credit to corporations in EMEs: foreign lenders exhibit a much higher reluctance to lend against hard assets as collateral. On the basis of differentiated lending technologies, we show that the rise of domestic global banks in channeling cross-border capital to EMEs has had a profound impact on i) who receives the capital and ii) how the capital is received. Inspired by these micro-level findings, we conduct a cross-country analysis and find that the rise of domestic global banks in transmitting cross-border capital to EMEs can have a far-reaching impact on these economies at the aggregate level. In particular, we find that the rise of domestic global banks in EMEs can greatly i) reshape the industry structure of these economies and ii) increase the economies’ susceptibility to global financing cycles.

Banking Across Borders

We explore the global footprint of Chinese banks and compare it with that of other bank nationalities. Chinese banks have become the largest cross-border creditors for almost half of all emerging market and developing economies (EMDEs). Their global reach resembles that of banks from advanced economies (AEs). We take a nationality approach as international banks, and Chinese banks in particular, grant a substantial share of their cross-border loans from affiliates located abroad. But differences remain. Using a gravity model with a novel measure of distance capturing the role of foreign affiliates across all bank nationalities, we find that larger distances deter cross-border bank lending to EMDEs more than to AEs. For Chinese banks, however, distance deters lending to EMDEs less than for peer EMDE banks. We show that for all banks combined, bilateral economic interactions like trade, FDI and portfolio investment, positively correlate with lending. Chinese banks’ lending to EMDEs also strongly correlates with trade, but not with FDI and, unlike other banks, it correlates negatively with portfolio investment.

'The Devil is in the Details, But so is Salvation': Different Approaches in Money Market Measurement

Considerable resources have been devoted to gathering data for the measurement of money market activity. However, little is known about the differences between available data and the structural effects of methodological choices. We use the novel dataset MMSR and compare it to data derived from a Furfine-type algorithm and survey data. The deviations in volumes and interest rates are driven by the asymmetric measurement of transactions, in particular affecting individual classes of banks, cross-border loans and specific types of loans. These differences are significant in terms of magnitude and affect overall rates and volumes. Even fundamental questions like the share of cross-border transactions depend on which data is used.

External Shocks, Cross Border Flows and Macroeconomic Risks in Emerging Market Economies

We study the relationship between cross border flows and risks to macroeconomic stability for a sample of ten major emerging market economies (EMEs) from 2000-2017 in the presence of external shocks. We examine this relationship with a focus on two key channels of cross border flows, namely external debt securities (EDS) and cross-border loans (CBL). A Markov regime switching analysis shows that EDS flows became the dominant channel of cross border flows post global financial crisis 2008 (GFC), confirming the idea of second phase of global liquidity \citep{shin2013sec}. We further estimate panel vector autoregression models to show that volatility in global risk perception plays a larger role in channelizing cross border flows to EMEs compared to the US monetary policy stance. Post GFC, EDS flows are particularly sensitive to shocks in global risk perception. CBL flows are associated with smaller risks pre GFC compared to the post GFC period which is in contrast to the result for EDS flows. Our results also show that EMEs with high levels of CBL flows face larger macroeconomic risks relative to EMEs with low levels of CBL flows whereas riskiness is high for EMEs with high and low levels of EDS flows. Finally, a panel threshold model confirms a non-linear association between EDS/CBL flows and macroeconomic risks. This results suggest that intensity of the association depends upon global risk uncertainty and that EDS flows present a larger macroeconomic risks to EMEs than CBL flows post-GFC.

Does the 'Foreignness' of Bank Loans Matter? Evidence from a New Dataset

We analyze the heterogeneity of bank loans in a newly constructed global dataset that explicitly distinguishes in a disaggregated loan-bank-firm setting between domestic loans and three categories of loans: loans by subsidiaries of banks, loans by bank branches, and direct cross-border loans. We find that borrower characteristics and loan conditions often significantly differ across different loan categories, with loans by bank subsidiaries in many respects resembling domestic loans rather than other loan categories. We also find pronounced non-monotonicities in loan conditions and borrower characteristics when moving from less foreign to more foreign bank loans.

Sovereign commercial bank restructuring agreements: should bond innovations or other modifications be adopted?

... As the 1980s gave way to the 1990s, there was a tectonic shift in sovereign debt restructuring. The 1980s were dominated by commercial bank restructurings as many sovereigns’ debt profiles were weighted heavily toward commercial bank cross-border loans. This shifted to arrangements related to tradable bonds as a result of the Brady initiative and other stimuli. And the shift intensified as pricing became highly attractive and execution could be lightning quick, enabling sovereigns to take advantage of favourable market windows. This shift, while broadening the investor base and facilitating diversification of risk also ‘pose[d] coordination and collective action problems in cases in which a sovereign’s scheduled debt service exceeds its payments capacity’.1 As a result, the dialogue in the international financial community tended away from sovereign commercial bank restructurings and toward the development of techniques and strategies to bring about better restructuring results for bonds and to curb the disruptions of non-consenting bondholders.

European Banks Straddling Borders: Risky or Rewarding?

Theory suggests that cross-border banking is beneficial as long as there is a non-perfect correlation across country-specific risks. Using a unique hand-collected dataset with cross-border loans for the 61 largest European banks, we find that cross-border banking in general decreases bank risk, and that the beneficial impact from cross-border banking increases when banks diversify more into countries with dissimilar economic and financial conditions. However, we find that banks do not fully utilize these diversification opportunities as banks mainly invest in countries that are economically more similar to their home country.

Global banking and the conduct of macroprudential policy in a monetary union

This paper questions the role of cross-border lending in the definition of national macroprudential policies in the European Monetary Union. We build and estimate a two-country DSGE model with corporate and interbank cross-border loans, Core-Periphery diverging financial cycles and a national implementation of coordinated macroprudential measures based on Countercyclical Capital Buffers. We get three main results. First, targeting a national credit-to-GDP ratio should be favored to federal averages as this rule induces better stabilizing performances in front of important divergences in credit cycles between core and peripheral countries. Second, policies reacting to the evolution of national credit supply should be favored as the transmission channel of macroprudential policy directly impacts the marginal cost of loan production and, by so, financial intermediaries. Third, the interest of lifting up macroprudential policymaking to the supra-national level remains questionable for admissible value of international lending between Eurozone countries. Indeed, national capital buffers reacting to the union-wide loan-to-GDP ratio only lead to the same stabilization results than the one obtained under the national reaction if cross-border lending reaches 45%. However, even if cross-border linkages are high enough to justify the implementation of a federal adjusted solution, the reaction to national lending conditions remains remarkably optimal.

Enhancing the mobility of collections and access to cultural heritage: immunity of cultural objects from seizure in Poland

This paper analyses, from the perspective of cultural policy considerations, the legal regime established by the recent Polish law on the immunity from seizure of cultural property on loan (2015). It deals with current trends of international museum exchange and explains the benefits and risks involved in cross-border loans of cultural material. This analysis is carried out by focusing on the actual practice and experiences of Polish museums, national and international regulations in force, and human rights considerations. The authors attempt to situate the Polish model for the protection of foreign cultural property on loan within the broader comparative context of the domestic legislation on museum exchange adopted in selected national jurisdictions. The article also offers a more general cultural policy discussion in the context of international museum exchanges of cultural material. Laws and policies facilitating such exchanges are weighed against other rights and interests encompassed in the protection of cultural heritage and the realisation of all human rights, including cultural rights.

The Great Cross-Border Bank Deleveraging: Supply Constraints and Intra-Group Frictions*

International banks greatly reduced their direct cross-border and local affiliates’ lending as the global financial crisis strained balance sheets, lowered borrower demand, and changed government policies. Using bilateral, lender-borrower countrydata and controlling for credit demand, we show that reductions largely varied in line with markets’ prior assessments of banks’ vulnerabilities, with banks’ financial statement variables and lender-borrower country characteristics playing minor roles. We find evidence that moving resources within banking groups became more restricted as drivers of reductions in direct cross-border loans differ from those for local affiliates’ lending, especially for impaired banking systems. Home bias induced by government interventions, however, affected both equally.

Crisis Transmission in the Global Banking Network

We study the transmission of financial sector shocks across borders through international bank connections. For this purpose, we use data on long-term interbank loans among more than 6,000 banks during 1997-2012 to construct a yearly global network of interbank exposures. We estimate the effect of direct (first-degree) and indirect (second-degree) exposures to countries experiencing systemic banking crises on bank profitability and loan supply. We find that direct exposures to crisis countries squeeze banks' profit margins, thereby reducing their returns. Indirect exposures to crisis countries enhance this effect, while indirect exposures to non-crisis countries mitigate it. Furthermore, crisis exposures have real effects in that they reduce banks' supply of domestic and cross-border loans. Our results, based on a large global sample, support the notion that interconnected financial systems facilitate shock transmission.

The Financial Crisis and Systemic Risks in Asia Pacific Banks: An Evaluation of Policy Responses

This paper examines the effects of the 2008 financial crisis on the Asia Pacific banking system and the policies that the local government authorities implemented in response to the crisis. We use descriptive statistics to examine capital adequacy and loan quality in the Asia Pacific banks. We show that the extent of spillover effects of the crisis on the Asia Pacific banking industry is associated with the trade-off between financial liberalization and financial stability; there is a linear relationship between foreign bank participation and cross-border loans in the Asia Pacific economies. We also conduct an event study to examine the systemic risks in the Asia Pacific banks. Particularly, we find that the CDS spread started to converge in 2009 after the implementation of stimulus packages and assertive policies in the Asia Pacific countries, implying that the policies adopted by the regional governments had at least some immediate effectiveness in helping banks decentralize the international financial shocks.

Financial crises and the composition of cross-border lending

We examine the composition and drivers of cross-border bank lending between 1995 and 2012, distinguishing between syndicated and non-syndicated loans. We show that on-balance sheet syndicated loan exposures, which account for almost one third of total cross-border loan exposures, increased during the global financial crisis due to large drawdowns on credit lines extended before the crisis. Our empirical analysis of the drivers of cross-border loan exposures in a large bilateral dataset leads to three main results. First, banks with lower levels of capital favor syndicated over other kinds of cross-border loans. Second, borrower country characteristics such as level of development, economic size, and capital account openness, are less important in driving syndicated than non-syndicated loan activity, suggesting a diversification motive for syndication. Third, information asymmetries between lender and borrower countries became more binding for both types of cross-border lending activity during the recent crisis.

An Econometric Analysis Regarding the Path of Non Performing Loans-A Panel Data Analysis from Mauritian Banks and Implications for the Banking Industry

The present study pertains to unravelling the internal (bank specific) and external (macroeconomic) determinants of nonperforming loans in Mauritius using annual report data from a panel of 10 existing banks and macroeconomic data for the period 2000 to 2012. The model used in the present instance comprises of a vector of bank specific and macro economic variables which include the inflation rate, lending interest rates, growth of the construction sector and tourism sector as well as global variables such as the Euro zone’s GDP growth. The model is tested both in a static and dynamic framework. Four estimation techniques are considered, viz Fixed Effects, differenced GMM, System GMM and Random coefficient estimation. The results indicate that, notwithstanding there are many significant factors influencing NPL, the most critical elements nevertheless remain declines in the construction sector and the rise in cross border loans. Interestingly, the study provides important policy insights which centres on the improvement of credit concentration guidelines as well as the modification of the MCIB reporting.