International Money Research Articles

Global Deleveraging and Foreign Banks’ Lending to Latin American Countries

Global Deleveraging and Foreign Banks’ Lending to Latin American Countries Herman Kamil (bio) and Kulwant Rai (bio) Lending by foreign banks to emerging markets is a defining feature of financial globalization. In the years preceding the recent global crisis, foreign bank lending to emerging economies expanded rapidly—whether directly from parent banks’ headquarters in advanced economies (cross-border flows) or through their affiliates operating in host countries. In the case of Latin America, lending by foreign banks became a significant source of funding for households and firms over the last decade. Although there is no consensus on the benefits of foreign banks’ activity, on balance the presence of foreign-owned banks is generally believed to have enhanced competition and aided overall financial stability.1 After the onset of the global credit crunch in 2008–09, however, foreign banks became a potential conduit through which financial stress in advanced economies could spread to emerging markets. Funding shortages in interbank markets and the need to deleverage bank balance sheets raised concerns that foreign banks would pull back from international lending activities, potentially disrupting macroeconomic and financial stability in emerging market economies.2 [End Page 1] In Latin America, the growth rate of total foreign banks’ credit slowed significantly after the collapse of Lehman Brothers in the third quarter of 2008. Yet crucially, the lending behavior of parent banks vis-à-vis their local affiliates in Latin American economies was starkly different. Cross-border lending, which is mostly denominated in foreign currencies, followed a boom-bust pattern, reversing sharply after the fourth quarter of 2008. In contrast, lending by their affiliates operating locally (a large share of which is denominated in host countries’ domestic currencies) proved much more resilient and continued to expand, even amid the financial turmoil. This paper explores how the global financial shocks were transmitted to Latin American countries through the foreign bank lending channel. For this purpose, we undertake an econometric analysis of the determinants of foreign banks’ lending to Latin American and Caribbean countries using data from the Bank for International Settlements (BIS). The sample covers twelve Latin American countries and spans 1999 (the first year for which data are available on a quarterly basis) to the first quarter of 2009, at the height of the global credit crunch. We assess the effects of three factors that characterized the recent global financial turmoil: the freezing of international money markets, the deterioration of the financial health of parent banks in advanced economies, and more restrictive lending standards in developed countries’ banking systems. The sample period used in the paper thus provides an event study of the transmission of the global crisis to foreign banks’ lending, rather than a systematic description of foreign banks’ reaction to crises. To identify the channels of transmission and the possible mitigating factors, we exploit differences in the geographic structure (cross-border versus local affiliates) and currency mix (foreign versus domestic) of foreign banks’ lending to Latin American countries at the bilateral level (that is, between each Latin American recipient country and a BIS-reporting creditor country in a given quarter). For this purpose, we rely on publicly available data from the BIS on the currency structure of foreign banks’ claims, together with confidential BIS data on the share of foreign banks’ total lending extended through local affiliates (in both domestic and foreign currencies). Our results indicate that international money market conditions had a significant impact on foreign banks’ lending to Latin American and Caribbean countries. In particular, an increase in the TED spread caused by liquidity shortages in the global interbank market adversely affects foreign banks’ lending growth to Latin American countries. Also, a deterioration of parent banks’ own financial soundness in advanced economies is associated with reductions in foreign banks’ financing to Latin American countries. Changes [End Page 2] in banks’ lending standards in advanced economies also seem to have a statistically significant effect on the growth of foreign banks’ credit to Latin American countries. However, we also find that the propagation of these global financial shocks was significantly more muted for countries where foreign banks conduct a higher share of their lending through their local affiliates in domestic currency than through cross-border...

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International Money Laundering: The Need for ICC Investigative and Adjudicative Jurisdiction

International Money Laundering: The Need for ICC Investigative and Adjudicative Jurisdiction

International Laws on Money Laundering

 Abstract—The term was only applied to financial transactions related to organized crime in the past. But today the definition is expanded by government regulators, to include any financial transaction which produces assets of an illegal act, which may involve actions such as tax avoidance or false accounting. In a simple meaning, money laundering refers to illegal or dirty money is put through cycle of transactions or cleanse, so that it comes out the other end as legal or clean money. This paper discusses the international money laundering laws such as the Vienna Convention, FATF and the Palermo Convention as well as UAE legal system (Anti-Money Laundering Act). Based on these facts, the paper infers that money laundering is a serious problem in new era and the laws against money laundering are not completely effective because the biggest problem arise with regard to enforcement. Finally, this paper presents some recommendations that important in the fighting against Money Laundering.

Banking Systemic Risk, Carry Trade and Exchange Rate Exposure: Is There a Relation?

We study what are the systemic impact of banks' carry trade and what are the determinants of this flow of international money. With that, we pretend to establish a relation between carry trade, exchange rate exposure and banking system risk which is novel in the literature. We used an unique data for brazilian banks exchange rate transactions combined with other micro and macro data. Our estimates do not discard that this link exists and can be established with temporal adjustments between funding and investment. Such evidence can be verified when we examined the changes of assets as determinants for banks' foreign funding attractiveness in disconnected periods. Those results and future analyzis and extensions of this work may better quantify this effect and serve as a basis for policy makers in terms of analysis of macroprudential policies.

How beneficial is international stock market information in domestic stock market trading?

This paper uses the foreign information transmission (FIT) model of Ibrahim and Brzeszczynski [Inter-regional and region-specific transmission of international stock market returns: The role of foreign information. Journal of International Money and Finance 28, no. 2: 322–43] to quantify the incremental benefits of foreign overnight international stock market information over domestic market momentum information. The main objective is to answer the question: how much more (or less) returns will a day trader earn by using various combinations of different interpretations of foreign news signals and domestic market momentum than the latter alone? Trading strategies are constructed with added features that take advantage of better modelling of changes over time in the return equivalent of the meteor shower of Engle, Ito, and Lin [Meteor showers or heat waves? Heteroscedastic intra-daily volatility in the foreign exchange market. Econometrica 58, no. 3: 525–42]. The results show that overnight international information is more economically beneficial than previous-day's domestic information. Moreover, better modelling of the time variation in the impact of this overnight information has substantial benefits to stock market investors.

Transmission of Shocks to LIBOR Risk Spreads and Nominal Risk-Free Rates

In this study, effects of shocks to international money market conditions, as measured by the three-month London Interbank Offer Rates (LIBOR) for five financially integrated economies (United States, the euro zone countries, Great Britain, Japan, and Canada) are examined. The sample period runs from January 4, 1999, through December 31, 2010. A fiveequation vector autoregressive (VAR) model is developed using daily risk spreads between each country’s LIBOR and its nominal risk-free rate. Also, effects of the risk spreads on the respective nominal risk-free rates are identified in a separate VAR system. Based on the risk-spread VAR, effects of exogenous shocks are examined. Single-country impulse tests show that the feedthrough effects on the other countries are surprisingly limited for these integrated countries. Only when a shock is applied concurrently to all five risk spreads can effects on the magnitude noted in 2008 and 2009 be replicated, suggesting that all LIBOR rates were affected by a contemporaneous shock. Finally, a proportion of the shock to the risk-spread feed has an inverse effect on each country’s nominal risk-free rate, reflecting the effect of the flow of funds from risky assets to safe assets in a time of increased risk and vice versa.

Tajik labor migrants and their international money transfers

During the four years since 2006, Tajikistan, еhe former Soviet republic, has been the world leader in receiving remittances as part of the GDP. However, despite the fact that over time there is growing interest due to the migration and remittances, few researchers pay attention to this region. In this paper, we use the results of the survey of families conducted in two different years to assess income of the families in Tajikistan and international labor migration of the Tajiks, and examine the relationship between income of the families in Tajikistan, the poorest of the former Soviet republics, and the remittances received from the international labor migrants, as well as the possibility of migration growth. No correlation was found between the level of family income and the amount of money sent from abroad, raising concerns about the altruistic models of the relationship between migration and remittances. Moreover, it also found that households with higher incomes are more able to supply workers, which shows that international labor migration from Tajikistan may not contribute to the Tajik migration of poor.

Cantillon on the Cause of the Business Cycles

Richard Cantillon was the first economist to successfully examine the cyclical nature of the capitalist economy. He lived at a time (168?–1734) when the institutions of the modern capitalist economy were first fully and widely established and the first major business cycles occurred. In contrast to the Mercantilists, Cantillon was an astute observer who developed a clear economic understanding of money, banking, international trade, and stock markets because this is where he risked his capital and earned his fortune. He modeled the economy as an interconnected whole and developed what we now know as the circular-flow model of the economy and the price-specie-flow mechanism of international money movements. He discovered that markets were regulated by the movements of prices based on supply and demand and identified equilibrating tendencies with market exchange.

Fingerprints to verify international money transfer at POS

Fingerprint recognition is to be used to verify international money transfers made to mobile wallets through point of sale (POS) devices located in other countries.

International Transmission of Monetary Shocks and the Non‐neutrality of International Money

AbstractMonetary shocks and how they are transmitted internationally are investigated in this paper. The paper shows that where a national currency is used as an international medium of exchange, the international money is non‐neutral. In particular, an increase in the supply of the international money leads to a transfer of real resources to the international money‐issuing country from its trading partner. It also induces an expansion of the nontradable sector in the international money‐issuing country, and an expansion of the tradable sector in its trading partner. The real impact of a monetary shock is greater under a fixed exchange rate system than under a flexible exchange rate system.

Market-specific and currency-specific risk during the global financial crisis: Evidence from the interbank markets in Tokyo and London

This paper investigates how international money markets reflected credit and liquidity risk during the global financial crisis. After matching the currency denomination, we examine how the Tokyo Interbank Offered Rate (TIBOR) was synchronized with the London Interbank Offered Rate (LIBOR). We find remarkably asymmetric responses in market-specific and currency-specific risk during the crisis. The regression results suggest that market-specific credit risk increased the difference across markets, whereas liquidity risk caused the difference across currency denominations. They also support the view that liquidity shortage of the US dollar occurred in international money markets during the crisis. Coordinated central bank liquidity provisions were useful in reducing the liquidity shortage of the US dollar, but their effectiveness was asymmetric across markets.

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Global financial crisis: global impact and solutions

Contents: Preface Part I Introduction: Introduction and analysis, John J. Kirton, Chiara Oldani and Paolo Savona. Part II Solutions in America and Asia: Crisis, response, and innovation in America and abroad, Robert C. Fauver Crisis, response, and innovation in Asia, Naoki Tanaka The macroeconomics of the global financial and economic crisis, Libero Monteforte. Part III Solutions for Europe: Crisis, response and innovation in Europe, Paolo Savona and Chiara Oldani Europe: from one crisis to the other, Paola Subacchi Europe's institutional, inflation, investment, and incentive challenges, Carlo A. Bollino. Part IV Impacts and Responses in the BRICs: Mediating financial instability: China, the BRICs, and continuing rise, Gregory Chin Russia: impact and response, Victoria Panova Brazil and Latin America: impact and response, Raffaele Galano. Part V Impacts and Responses in Developing Countries: Sub-Saharan Africa: impact and response, DiA(c)ry Seck Africa in the face of the crisis, George M. von Furstenberg The broader impacts on the developing world, Sara Savastano. Part VI Innovation in Global Economic Governance: From the dollar standard to a supernational money, Pietro Alessandrini and Michele Fratianni The role of international money, Juan Carlos Martinez Oliva Asymmetries in the international monetary system, Domenico Lombardi. Part VII From G8 to G20: Reconciling the Gs: the G8, the G5, and the G20 in a world of crisis, Andrew F. Cooper and Andrew Schrumm The G8, the G20, and civil society, Hugo Dobson The G8 and the G20: rejuvenated by the crisis, Giorgio La Malfa The contribution of the G8's 2009 L'Aquila summit, John J. Kirton. Part VIII Conclusion: Conclusion and recommendations, John J. Kirton Index.

The Benefits and Costs of an International Currency: Getting the Calculus Right

Does it pay to issue an international money? Should a government promote internationalization of its currency? And if so, how might policy makers shape cross-border use to maximize net gains? The aim of this essay is to address these old questions anew, in hopes of providing clearer insight into the strategic calculus involved. Scholars have debated the net benefits or costs of currency internationalization for decades. Yet despite much sound and fury little analytical consensus exists. The conventional literature is marred by at least three critical defects, which might be called the three M’s—Misconceptions, Misplaced Concreteness, and outright Mistakes. A proper appreciation of the three M’s, I endeavor to show, can take us a long way toward getting the calculus right.

El sector externo Colombiano: retrovisión y perspectivas

Resumen En este artículo se hace un examen general de la evolución comercial y financiera externa colombiana en el decenio 1974-1984 y de su relación con las políticas económicas de los tres últimos gobiernos (gobierno de Alfonso López Michelsen: 1974-1978; gobierno de Julio César Turbay Ayala: 1978-1982; gobierno de Belisario Betancur Cuartas: 1982 - hasta el presente), con el propósito de explicar el origen y las características de la crisis del sector externo colombiano iniciada a mediados de 1980 y que subsiste en la actualidad (junio de 1985). Esta crisis ha tenido causas externas (debilitamiento del mercado mundial del café y dificultades del mercado internacional de capitales) pero, también, una causa doméstica: las inadecuadas políticas económicas de los tres últimos gobiernos. En varias ocasiones éstos han tomado políticas claramente contrarias a la estabilización del sector externo, han dejado de tomar medidas anti-cíclicas, o han adoptado las medidas indicadas pero en dosis equivocadas o de manera tardía. De todas formas, y por razones diferentes a medidas coyunturales del Estado, el sector externo colombiano presenta una perspectiva favorable para el período 1986-1990. De este análisis el autor extrae algunas lecciones sobre el tipo de intervenciones estatales en el frente externo de la economía colombiana que deberían adoptarse en el futuro próximo. Abstract In this article, an overall review is made of Colombian’s foreign commercial and financial evolution, in relation to the economic policies of the last three governments (Alfonso Lopez Michelsen s: 1974-1978, Julio César Turbay Ayala's: 1978-1982, and Belisario Betancur Cuartas up to the presente), with a view to explaining the origin and characteristics of the crisis which began in its external! sector in mid 1980 and subsists today (June 1985). Although this crisis involved external causes (wakening of the world coffee market and difficulties in the international money market], there has also been a domestic cause, namely, the inadequate economic policies of the last three governments on various occasions, they have adopted measures e/early contrary to the stability of the foreign sector, have failed to take anticiclical measures or when having taken the correct measures, these have been lacking or too late. Nevertheless, and due to conditions not related with government's recent measures, Colombia’s external sector presents a promising outlook for the period: 1986-1990. Based on this reasoning, the author shows some of the lessons, to be learned, on the kind of government intervention that should be adopted in the near future, for Colombia’s foreign economic front. Palabras claves: Crisis del sector externo colombiano, evolución comercial externa colombiana.

Euro vs Dollar: An Improbable Threat

Ever since the setting up of the EMU, many scholars have argued that the Euro will take its place alongside the dollar and perhaps even replace it as international money. The theory behind this point of view is represented by search-theoretic models. The fundamental shortcoming of the traditional version of these models is that they fail to make a distinction between different types of money, in particular between commodity money and fiduciary money. In the international context a fiduciary money can be accepted only when a political exchange is possible between a leading country which has an interest in producing trust in the future value of its currency and other countries which attach no importance to the relative gains the issuing country acquires by exploiting the privilege of seigniorage. The Bretton Woods system and the dollar standard, although based on fiduciary monies, have worked thanks to the institutional framework maintained by the United States and accepted by other countries. Unlike the United States, the euro area is not in a position to exercise any form of political leadership on the international scene. As things stand the euro does not represent a threat to the dollar and it is bound to remain a regional money.

The Enduring Importance of The General Theory

This paper examines some features of The General Theory that remain relevant 75 years after its publication. Keynes showed that even in a competitive economy with perfectly flexible prices, wages and interest rates, market prices could not guarantee full employment and that the achievement of full employment would only be a fluke. In other words, he showed that there was no natural mechanism to drive the economy to full employment, and that the level of employment was determined by effective demand rather than by the wage rate. He demonstrated this by using a method that stressed the relationship between cause and effect in determining key variables and relations in the economy. Keynes demonstrated that monetary variables affected real variables, and real variables affected monetary ones, in both the short run and long run. This can be contrasted with mainstream theory, where the long-run neutrality of money remains a key result. The paper proposes a rehabilitation of Keynes's analysis of the supply and demand for money—away from its original role in explaining domestic monetary influences and towards providing an analysis of supply and demand for international money.

Small Lessons from the Recent Euro-Dollar Skirmishes

We investigate in this paper the skirmishes that the US dollar and the Euro had from 2007 to 2011 and, in particular, the two distinct sharp falls that the single currency had in 2008 and 2010. We basically consider how impulses coming from domestic money markets impact on the USD/EUR exchange rate through the Eurocurrency market. Our findings show that the cycles in the spreads in the LIBOR rates have a bearing on the direction of change in the spot exchange rate in a way which is different from that predicted by the interest rate parity. The exposure of the value of reserve currencies to the vagaries of the outside circulation in the Eurocurrency and FX markets is only one of the many different policy implications of the current arrangement of the international monetary system. In the final part of the paper we also discuss some of those tied to the very existence of the international money market and to competition among old and emerging global currencies and financial centres.

Wielding Finance as a Weapon of Diplomacy: France and Britain in the 1920s

France had long conceived of finance as an instrument of diplomacy. The role of French finance in the sealing of the Franco-Russian Alliance in 1892 is well known; the Quai d'Orsay's use of access to the French financial markets and the Bourse as an arm of foreign policy before the War was the subject of much research in the early 1970s. However, the use of currency speculation as a diplomatic instrument has received little attention. Of course, under a regime of fixed rate parities as existed before the Great War—the Gold Exchange Standard—currency fluctuation was uncommon; it was extremely difficult to attack currencies in a concerted manner on the international money markets for any reason, let alone for diplomatic advantage. But following the outbreak of the Great War, many currencies came off the gold standard, and a state of financial turmoil prevailed in the post-war period. The French franc was not alone in being buffeted on the international market. Currency vulnerability and the ramifications it had for national economic policies became all too obvious. Friends and foe alike could not ignore how short-term concerted action by banks and financial institutions on a currency by heavy selling or buying could undermine governments and their policies. It was not long before governments would view currency speculation as a means of influencing policy. The question of stabilising the French franc in the 1920s and returning it to a fixed parity against gold has been studied from economic and political dimensions; the diplomatic has been the missing dimension. This article looks at the stabilisation of the French currency in 1926 under Raymond Poincaré and the manner in which finance was wielded as an instrument of diplomacy against Britain. It first analyses how France perceived herself to be the object of currency manipulation for political aims by Germany and Britain in the early 1920s, and then it analyses how during the stabilisation of the franc after 1926 under Premier and Finance Minister Raymond Poincaré she was able to turn the tables and use short-term financial advantage as leverage against Britain on important policy matters.