The pension sector is an important investor group in global financial markets and a key holder of government and corporate debt. This article examines the evolution of pension fund asset allocations around the globe and documents two important structural changes. First, pension investors have shifted portfolio share allocations away from fixed income securities. This trend is robust across Defined Contribution (DC) and Defined Benefit (DB) programs as well as country groups. Second, pensions have instead shifted allocations into riskier investments within mutual funds as well as alternative investments. We hypothesize that a global decline in interest rates is one potential driver of this change. Using a global sample, we show that declining local currency government bond yields are associated with lower bond pension portfolio shares and higher holdings shares of mutual funds and foreign assets. We discuss the potential implications of these trends for borrowing costs. The declining holding share of pension as a long-term investor group implies a lower cost increase in response to new debt issuance, but it may come at a cost of higher yield sensitivity to global uncertainty.

We study how U.S. dollar fluctuations transmit through domestic supply chains in emerging markets. Large firms borrow in foreign currency and extend trade credit to domestic partners, exposing the supply chain to exchange rate risk. We develop a model where financially constrained suppliers pass through shocks to buyers, while unconstrained firms absorb them. Using quarterly firm-level data from 19 emerging markets, we provide empirical evidence consistent with the model’s predictions. We find that even highly exposed firms reduce trade credit only modestly following a depreciation, while accepting large profit losses, suggesting that firm-to-firm credit relationships partially shield downstream firms from financial shocks.

It is well-known that dollar credit to emerging market (EM) corporates has expanded dramatically in the past two decades. However, the concurrent expansion of local currency credit, facilitated by more developed domestic financial systems, has been less recognized. This paper first uses data on EM corporates' borrowing through bonds and syndicated loans to show the considerable rise of their local currency debt. It then utilizes comprehensive firm-level data to document that EM corporates' local currency borrowing can offset shocks to their dollar debt, and how this varies across firms and countries. A broad dollar appreciation is associated with a decline in credit to ''local" firms (smaller, non-exporting, with low profitability) but has no significant impact on ''global" firms (larger, exporting, highly profitable). Firms in the mid-range (of these dimensions) see lower dollar debt in response to a stronger dollar, but replace it with local currency debt, thus offsetting the shock.

This paper studies whether investor composition affects the sovereign debt market. We construct a data set of sovereign debt holdings by foreign and domestic bank, nonbank private and official investors for 101 countries across three decades. Compared with other investors, private nonbank investors absorb a disproportionate share of the debt supply, and their demand for emerging market debt is most price responsive. A counterfactual analysis of emerging market sovereigns shows a 10% increase in debt leads to a 5.8% yield increase but an outsized 8.4% increase without nonbank investors. We conclude that sovereigns are vulnerable to the loss of nonbanks.

We use detailed firm-level data from Mexico to document that non-financial corporations engage in carry trades by borrowing in foreign currency (FX) and lending in domestic currency, largely in the form of trade credit, accumulating currency risk in the process. Firms are more active in carry-trades when FX borrowing is relatively cheaper and build currency risk by accumulating peso assets. We use the 2009 Mexican peso depreciation to show that firms that were more active in carry trades experienced larger reductions in investment. Nevertheless, their extension of trade credit remained stable, insulating their trading partners from their balance sheet exposure to the shock.

This paper uses a unique dataset and improved identification to uncover several new aspects of foreign currency (FX) balance sheet shocks. First, shocked firms see a contraction in their FX loan borrowing, but large firms are able to replace the lost borrowing with local currency loans. Second, the cost of borrowing in FX increases for these firms, contributing to the shift away from FX credit. Third, larger banks are less sensitive in their FX lending to such shocks to their individual borrowers. Fourth, there are no real effects for large firms, but small firms see lower credit and profits, and decrease investment and employment of hourly workers.

We quantify the sovereign-bank doom loop by using the 1999 Marmara earthquake as an exogenous shock leading to an increase in Turkey’s default risk. Our theoretical model illustrates that for banks with higher exposure to government securities, a higher sovereign default risk implies lower net worth and tightening financial constraint. Our empirical estimates confirm the model’s predictions, showing that the exogenous change in sovereign default risk tightens banks’ financial constraints significantly for banks that hold a higher amount of government securities. The resulting tighter bank financial constraints translate into lower credit provision, suggesting that there is a significant balance-sheet channel in transmitting a higher sovereign default risk toward real economic activity.

We construct a new quarterly data set of international capital flows broken down by sector-banks, corporates, and sovereigns-and demonstrate the importance of distinguishing capital flows by the sector of domestic borrowers and lenders. We document four new sets of facts. First, banks account for the largest part of the external debt (stocks and flows) in advanced economies, whereas in emerging markets, banks, corporates, and sovereigns have roughly equal shares. Second, the high correlation between total capital inflows and outflows documented in the literature is driven by banking sector flows; that is, domestic banks' borrowing from foreigners is highly correlated with domestic banks' lending to foreigners. Third, sovereign flows behave very differently from and often act as a countervailing force to private sector (banking and corporate) flows, especially in emerging markets. Fourth, different shocks (global financial cycles versus domestic business cycles; banking versus currency versus sovereign crises) generate very distinct patterns of capital inflows and outflows by sector. The stylized facts we document deepen our understanding of the dynamics and behavior of capital flows and have important implications for open economy models.

In the wake of the Covid-19 fallout, policymakers enacted a wide range of measures to support the flow of credit. Some measures strengthened banks’ lending capacity by preserving their capital and encouraging flexibility in loss accounting. Others, such as state-backed loan guarantees or funding for lending programmes, incentivised banks to use their available capacity. We find evidence that both types of measures contributed to lending growth. Strong banks with ample balance sheet capacity could accommodate the large drawdown of corporate credit lines in the first months of the pandemic. Policy support appeared to foster further lending. Banks that increased their lending capacity increased their lending more than other banks. More generous guarantee programmes were associated with banks reporting looser lending standards and higher lending growth. Benefitting from such programmes, small and medium-sized enterprises expanded their borrowing, especially those in sectors hit hard by the pandemic.

Prudential regulation of banks is multi-layered: policy changes by home-country authorities affect banks' global operations across many jurisdictions; changes by host-country authorities shape banks' operations in the host jurisdiction regardless of the nationality of the parent bank. Which layer matters most? Do these policies create cross-border spillovers? And how does monetary policy alter these spillovers? This paper examines the effect that changes in home- and hostcountry prudential measures have on cross-border credit, and how these interact with monetary policy. We use a novel approach to decompose growth in cross-border bank lending into separate home, host and common components, and then match each with the home or host policies that affect this component. Our results suggest that prudential policies can have spillover effects, which depend on the instrument used and on whether a bank's home or host country implemented them. Home policies tend to have larger spillovers on cross-border US dollar lending than host policies, primarily through substitution effects. We also find that a tightening of US monetary policy can compound the spillovers of certain prudential measures.

In the context of the Covid crisis, authorities adopted dividend payout restrictions to enhance bank resilience and support stronger growth in bank lending. Restrictions may reduce short-term equity returns for bank shareholders, especially in the case of banks with a low price-to-book ratio. In line with these predictions, bank equity prices fell with dividend restriction announcements, but credit default swap (CDS) spreads indicated that default risk either fell or was unaffected, even in the face of the economic downturn. Bank capitalisation rose in jurisdictions which restricted payouts, supporting institutional and systemwide stability; the increased capital was more likely to support greater lending with restrictions present.

We study the relationship between bank geographic complexity and risk using a unique dataset of 96 global bank holding companies (BHCs) over 2008–2016. From data on the affiliate network of internationally active banking entities, we construct a measure of geographic coverage and complexity for each BHC. We find that higher geographic complexity heightens banks’ capacity to absorb local economic shocks, reducing their risk. However, higher geographic complexity can also help banks soften the impact of prudential regulation, increasing their risk. Bank geographic complexity therefore has a Janus face, decreasing some but increasing other aspects of bank risk.

Financial crises are accompanied by permanent drops in economic growth and output. Technological progress and innovation are important drivers of economic growth. Using cross-country panel data on patenting at the industry-level, we connect these facts and show that financial crises have large and long-lasting impacts on innovation (measured by patenting) for sectors dependent on external finance. This effect is driven by banking crises, which have both immediate and long lasting impacts — upwards of 8 years. This is consistent with firms both losing funding for new projects (reducing patents in the long-term) and needing to liquidate existing projects to meet immediate financing pressures (reducing patents in the near-term). This compares to stock market crashes, which see an immediate decline followed by a compensating increase, consistent with projects being “shelved” and redeployed later. Banking crises are thus unique in their impact on innovation, providing a link between them and the observed patterns of persistently lower long-term growth. The effects are larger if the banking crisis was preceded by weak or leveraged banks. We do not observe a decline in patent quality during banking crises. This financial channel of innovation is not operative for currency crises, but we do find evidence for a trade channel, whereby higher exporting industries increase their patenting following the accompanying terms of trade improvement.

Debt securities markets have grown globally. Exploring the BIS international debt securities statistics, we find that the offshore affiliates of non-financial corporates (NFCs) have played an important role since the Great Financial Crisis. For NFCs from emerging market economies (EMEs) in particular, debt issuance through such affiliates – mainly in US dollars – has been closely linked with global financial conditions. Against the backdrop of a temporary spike in credit risk premia after the pandemic's outbreak, issuance has been robust throughout the past year. Combining data on both international and domestic debt securities reveals that borrowing by advanced economy firms and by hard-hit EME industries has surged.

Banks' performance on equity and debt markets since the Covid-19 outbreak has been on a par with that experienced after the collapse of Lehman Brothers in 2008. During the initial phase, the market sell-off swept over all banks, which underperformed significantly relative to other sectors. Still, markets showed some differentiation by bank nationality, and credit default swap (CDS) spreads rose the most for those banks that had entered the crisis with the highest level of credit risk. The subsequent stabilisation, brought about by forceful policy measures since mid-March, has favoured banks with higher profitability and healthier balance sheets. Less profitable banks saw their long-term rating outlooks revised to negative. And the CDS spreads of the riskiest banks continued increasing even through the stabilisation phase.

The claims of international banks held up well during the COVID-19 crisis, although economic output fell by even more than during the Great Financial Crisis (GFC). Both cross-border and local claims were resilient, in advanced and emerging market economies alike. Looking at lending to the real economy, we examine how borrower and lender characteristics relate to the growth of claims on the private non-financial sector during the pandemic. We find that countries with stronger economic activity and smaller financial vulnerabilities borrowed more. Likewise, better capitalised banking systems lent more. The economic stress also led advanced economy borrowers to draw on pre-existing credit lines from foreign banks.