Global banks or global investors? The case of European debt flows

Abstract

A consensus is emerging that in order to understand the global financial landscape one needs to pay attention to the key institutions that are said to dominate it, namely large banking entities. This paper challenges that consensus as applied to eurozone-centred debt flows. Though bank-centred approaches are well equipped to explain a significant portion of cross-border debt dynamics through carry trades, there is little evidence this constituted the central mechanism for channelling flows. The expansion of debt flows is instead explained by depressed returns on fixed income instruments and the ensuing asset-liability mismatches which led investors to move into financial sector debt and yield-producing securitized assets. An investor-centred as opposed to a bank-centred understanding of debt flows has important financial stability and policy implications.

Keywords

European imbalances capital flows global banks institutional investors securitization financialization

Get full access to this article

View all access options for this article.

References

Acharya

Schnabl

(2010) Do global banks spread global imbalances? Asset-backed commercial paper during the financial crisis of 2007–09. IMF Economic Review 58(1): 37–73.

Acharya

Steffen

(2015) The “greatest” carry trade ever? Understanding eurozone bank risks. Journal of Financial Economics 115(2): 215–236.

Adrian

Shin

(2008) Liquidity, monetary policy, and financial cycles. Current Issues in Economics and Finance 14(1): 1–7. .

Adrian

Shin

(2010) Liquidity and leverage. Journal of Financial Intermediation 19(3): 418–437.

Adrian

Shin

(2013) Financial intermediary balance sheet management. In: Winkler

Riet

Van Bull

et al. (eds) A Flow-of-Funds Perspective on the Financial Crisis Volume I: Money, Credit and Sectoral Balance Sheets, Hampshire, UK: Palgrave Macmillan, pp. 177–202. .

AFME (2012) Investment in European securitisation by European insurers pre vs post crisis, and prospects for the future. Report, Association of Financial Markets Europe.

Aglietta

Rigot

(2009) The regulation of hedge funds under the prism of the financial crisis. Policy implications. Recherches économiques de Louvain 75(1): 5–34.

Amenc

Malaise

Martellini

(2004) Revisiting core-satellite investing: A dynamic model of relative risk management. The Journal of Portfolio Management Fall: 64–75.

Andritsky JR (2012) Government bonds and their investors: What are the facts and do they matter? Working Paper 12.158, International Monetary Fund.

10.

Ayadi

De Groen

Sassi

et al. (2016) Bank Business Models Monitor 2015 Europe, HEC Montreal.

11.

Bertaut

et al. (2012) ABS inflows to the United States and the global financial crisis. Journal of International Economics 88(2): 219–234.

12.

BIS (2001) The changing shape of fixed income markets. Report, Bank of International Settlements: Study Group on Financial Markets.

13.

BIS (2011) Fixed income strategies of insurance companies and pension funds. Report, Bank of International Settlements: Report of the Committee on Global Financial Stability.

14.

BlackRock (2015) LDI essential guide: The essentials of liability driven investment. Report, BlackRock Investments.

15.

Blommestein

Keskinler

Lucas

(2011) Outlook for the securitisation market. OECD Journal: Financial Market Trends 1: 1–18.

16.

Bruno

Shin

(2014) Cross-border banking and global liquidity. The Review of Economic Studies 82(2): 535–564.

17.

Caballero RJ (2010) The ‘other’ imbalance and the financial crisis. Working Paper 15636, National Bureau of Economic Research.

18.

Caouette

et al. (2008) Managing Credit Risk, NJ, US: John Wiley and Sons.

19.

Casey

Lannoo

(2005) Europe's Hidden Capital Markets: Evolution, Architecture and Regulation of the European Bond Market, Brussels: Centre for Economic and Policy Studies.

20.

Cerutti E, Claessens S and Ratnovski L (2014) Global liquidity and drivers of cross-border bank flows. Working Paper 14.69.1, International Monetary Fund.

21.

Choudhry

(2012) The Principles of Banking, Singapore: John Wiley and Sons.

22.

Crotty

(2008) If financial market competition is intense, why are financial firm profits so high? Reflections on the current ‘golden age’ of finance. Competition and Change 12(2): 167–183.

23.

De Santis

Gerard

(2009) International portfolio reallocation: Diversification benefits and European monetary union. European Economic Review 53(8): 1010–1027.

24.

Domanski D, Shin HS and Sushko V (2015) The hunt for duration: Not waving but drowning? Working Paper 519, Bank of International Settlements: Monetary and Economic Department.

25.

ECB (2001) The euro bond market. Report, European Central Bank.

26.

ECB (2006) Financial Stability Report. European Central Bank.

27.

ECB (2011) Euro Area markets for banks' long-term debt financing instruments: Recent developments, state of integration, and implications for monetary policy transmission mechanism. Report, European Central Bank Monthly Bulletin: November.

28.

ESRB (2015a) Report on systemic risks in the EU insurance sector. European Systemic Risk Board.

29.

ESRB (2015b) Network analysis of the EU insurance sector. Occasional Paper 7, European Systemic Risk Board.

30.

Euroclear (2009) Understanding Repos and the Repo Markets, Euroclear Belgium.

31.

European Commission (2015) The 2015 Ageing Report: Economic and Budgetary Projections for the 28 EU Member States (2013–2060), European Commission. The European Economy Series 3.

32.

Everett MM (2015) International liquidity and the European sovereign debt crisis: Was euro area unconventional monetary policy successful? Working paper 23, Institute of Economic Research, Hitotsubashi University.

33.

Gabor

(2012) The power of collateral: The ECB and bank funding strategies in crisis. In: Goodhart

Gabor

Vestegaard

et al. (eds) Central Banking at Cross-Roads, London, UK: Anthem Press.

34.

Gabor

(2014) The IMF's rethink of global banks: Critical in theory, orthodox in practice. Governance 28(2): 199–218.

35.

Gabor

Ban

(2016) Banking on bonds: The new links between states and markets. Journal of Common Market Studies 54(3): 617–635.

36.

Gabor D and Vestergaard J (2016) Towards a theory of shadow money. INET Working Paper.

37.

Goodhart

CAE

Perotti

(2015) Maturity mismatch stretching: Banking has taken a wrong turn. CEPR Policy Insight 81.

38.

Grahl

(2009) Financial markets and social security. In: Grahl

(ed.) Global Finance and Social Europe, Cheltenham, UK: Edward Elgar, pp. 187–200.

39.

Grahl

Lysandrou

(2003) Sand in the wheels or spanner in the works? The Tobin tax and global finance. Cambridge Journal of Economics 27(4): 597–621.

40.

Grahl

Lysandrou

(2006) Capital market trading volume: An overview and some preliminary conclusions. Cambridge Journal of Economics 30(6): 955–979.

41.

Grahl

Lysandrou

(2014) The European Commission's proposal for a financial transactions tax: A critical assessment. Journal of Common Market Studies 52(2): 234–249.

42.

Greenwich Associates (2014a) Fixed income investors Europe: Asset-backed securities. Report, Greenwich Associates, Connecticut.

43.

Greenwich Associates (2014b) Fixed income investors Europe: Covered bonds. Report, Greenwich Associates, Connecticut.

44.

Greenwich Associates (2014c) Fixed income investors Europe: Government bonds. Report, Greenwich Associates, Connecticut.

45.

Greenwich Associates (2014d) Fixed income investors Europe: Investment grade bonds. Report, Greenwich Associates, Connecticut.

46.

Hale

Obstfeld

(2016) The euro and the geography of international debt flows. Journal of the European Economic Association 14(1): 115–144.

47.

IMF (2011) Global financial stability report September 2011: Long-term investors and their asset allocation: Where are they now? Report, International Monetary Fund.

48.

IMF (2013) Global financial stability report October 2013: Changes in bank funding patterns and bank stability risk. Report, International Monetary Fund.

49.

IMF (2016) Global financial stability report April 2016: The insurance sector: Trends and systematic risk implications. Report, International Monetary Fund.

50.

Lane PR (2013) Capital flows in the Euro Area. Economic Papers 497, European Commission.

51.

Langley

(2006) Securitising suburbia: The transformation of Anglo-American mortgage finance. Competition & Change 10(3): 283–299.

52.

Le Lesle MV (2012) Bank debt in Europe: Are funding models broken? Working paper 12.299, International Monetary Fund.

53.

Lysandrou

(2009) The transformation of corporate Europe. In: Grahl

(ed.) Global Finance and Social Europe, Cheltenham, UK: Edward Elgar, pp. 167–186.

54.

Lysandrou

(2011) The primacy of hedge funds in the subprime crisis. Journal of Post Keynesian Economics 34(2): 225–254.

55.

Lysandrou

Nesvetailova

(2015) The role of shadow banking entities in the financial crisis: A disaggregated view. Review of International Political Economy 22(2): 257–279.

56.

Lysandrou P and Shabani M (2015) Shadow banking and the explosive growth of the ABCP market between 2004 and 2007: A ‘search for yield’ story. Working Paper. City University London.

57.

McGuire

von Peter

(2009) The US dollar shortage in global banking. BIS Quarterly Review 47.

58.

Mehrling

(2010) The New Lombard Street: How the Fed Became the Dealer of Last Resort, Princeton University Press.

59.

Noeth

Sengupta

(2012) Global European banks and the financial crisis. Federal Reserve Bank of St. Louis Review 94(6): 457–479.

60.

O'Connell

(2015) European crisis: A new tale of Center–Periphery relations in the world of financial liberalization/globalization? International Journal of Political Economy 44(3): 174–195.

61.

Packer

Stever

Upper

(2007) The covered bond market. BIS Quarterly Review. September.

62.

Pozsar

(2013) Institutional cash pools and the Triffin dilemma of the US banking system. Financial Markets, Institutions & Instruments 22(5): 283–318.

63.

Pozsar Z (2015) A macro view of shadow banking: Leveraged betas and wholesale funding in the context of secular stagnation. Report, Shadow Banking Colloquium, Institute for New Economic Thinking.

64.

SIFMA (2009) 1st European covered bond investor's survey. Report, Securities Industry and Financial Markets Association.

65.

Shin H (2009) Leverage, securitization and global imbalances. Occasional Paper 5, Hong Kong Institute for Monetary Research.

66.

Shin

(2012) Global banking glut and loan risk premium. IMF Economic Review 60(2): 155–192.

67.

Stigum

Crescenzi

(2007) Stigum's Money Market. vol. 4, New York: McGraw-Hill.

68.

Stockhammer

(2011) Peripheral Europe's debt and German wages: The role of wage policy in the Euro area. International Journal of Public Policy 7(1–3): 83–96.

69.

Thiemann

(2012) ‘Out of the shadows?’ Accounting for special purpose entities in European banking systems. Competition and Change 16(1): 37–55.

70.

Tokunaga J and Epstein G (2014) The endogenous finance of global dollar-based financial fragility in the 2000s: A Minskian approach. Working Paper 340, Political Economy Research Institute.

71.

Tschampion

Siegel

Takahashi

et al. (2007) Managing institutional investor portfolios. In: Maginn

Tuttle

McLeavey

et al. (eds) Managing Investment Portfolios: A Dynamic Process Vol 3, NJ, US: John Wiley and Sons, pp. 63–127.

72.

Van Treeck T and Simon S (2012) Income inequality as a cause of the Great Recession?: A survey of current debates. Report 39, International Labour Organization: Conditions of Work and Employment Branch Series.

73.

Von Rixtel A, Gonzalez LR and Yang J (2015) The determinants of long-term debt issuance by European banks: Evidence of two crises. Working paper 513, Bank of International Settlements: Monetary and Economic Department.

74.

Wilmarth

Jr (2010) Reforming financial regulation to address the too-big-to-fail problem. Brooklyn Journal of International Law 35(3): 707–783.