Financial stress in lender countries and capital outflows from emerging market economies

Ilhyock Shim, Kwanho Shin

Research output: Contribution to journalArticlepeer-review

12 Citations (Scopus)

Abstract

We investigate if financial stress in countries where international banks are headquartered is a major driver of the withdrawal of these banks’ credit to emerging market economies (EMEs). We find that when financial stress, measured by sovereign or bank CDS spreads or corporate bond spreads, increases, international banks decrease their lending to EMEs, which acts as a major driver of capital outflows from EMEs. In particular, financial stress in lender countries is a more important driver than the local financial conditions and macroeconomic fundamentals of EMEs. Such results hold for both the countries that experienced crises and those that did not, during the Global Financial Crisis (GFC). Such results also generally hold even after the GFC period, but to a lesser extent. Our findings suggest that it is desirable for EME policymakers to promote diversification of lender countries.

Original languageEnglish
Article number102356
JournalJournal of International Money and Finance
Volume113
DOIs
Publication statusPublished - 2021 May

Bibliographical note

Funding Information:
We are grateful for comments by Claudio Borio, Menzie Chinn (the Editor), Stijn Claessens, Georgios Georgiadis, Catherine Koch, Patrick McGuire, Madhusudan Mohanty, Hyun Song Shin, Elod Takáts, Takats and other participants in seminars at the Bank for International Settlements (BIS) headquarters in Basel and the Representative Office for Asia and the Pacific in Hong Kong SAR, and the National Graduate Institute for Policy Studies in Tokyo. We thank Dohoon Kim, Ran Li and Jose Maria Vidal Pastor for excellent research assistance, and the Bank for International Settlements for financial support, and Patrick McGuire and Jakub Demski for providing data on break and exchange rate adjusted bilateral foreign claims. The views expressed in this paper are solely those of the authors, and do not necessarily represent the views of the BIS.

Funding Information:
We are grateful for comments by Claudio Borio, Menzie Chinn (the Editor), Stijn Claessens, Georgios Georgiadis, Catherine Koch, Patrick McGuire, Madhusudan Mohanty, Hyun Song Shin, Elod Tak?ts, Takats and other participants in seminars at the Bank for International Settlements (BIS) headquarters in Basel and the Representative Office for Asia and the Pacific in Hong Kong SAR, and the National Graduate Institute for Policy Studies in Tokyo. We thank Dohoon Kim, Ran Li and Jose Maria Vidal Pastor for excellent research assistance, and the Bank for International Settlements for financial support, and Patrick McGuire and Jakub Demski for providing data on break and exchange rate adjusted bilateral foreign claims. The views expressed in this paper are solely those of the authors, and do not necessarily represent the views of the BIS.

Publisher Copyright:
© 2021 Elsevier Ltd

Keywords

  • Capital outflows
  • Cross-border claims
  • Emerging market economies
  • Financial stress

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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