The Two Faces of Cross-Border Banking Flows

The paper examines the determinants of cross-border interbank and intragroup funding across crisis and noncrisis periods. Using a previously unexplored data set spanning 25 banking systems, it finds that aggregate intragroup funding is unrelated to fluctuations in either global or local macroeconomic fluctuations, while flightier interbank funding responds procyclically to both worldwide and domestic economic trends. This feature of the data means intragroup funding remains comparatively stable when global conditions deteriorate—even during the global financial crisis. During “normal” times the paper finds that intragroup funding responds countercyclically to global interest rate changes, with parent banks using affiliates to offset tighter global funding conditions. More generally, it finds that intragroup funding has a closer relationship with domestic banking system profitability and solvency, being used to support banks in weaker banking systems during the global financial crisis.