International Bank Portfolios: Short‐ and Long‐Run Responses to Macroeconomic Conditions

Abstract

International bank portfolios constitute a large component of international country portfolios. Yet, banks' response to international macroeconomic conditions remains largely unexplored. We use a novel dataset on banks' international portfolios to answer three questions. First, what are the long‐run determinants of banks' international portfolios? Second, how do banks' international portfolios adjust to short‐run macroeconomic developments? Third, does the speed of adjustment change with the degree of financial integration? We find that, in the long‐run, market size has a positive impact on foreign assets and liabilities. An increase in the interest differential between the home and the foreign economy lowers foreign assets and increases foreign liabilities. Foreign trade has a positive impact on international bank portfolios, which is independent from the effect of other macroeconomic variables. Short‐run dynamics show heterogeneity across countries, but these dynamics can partly be explained with gravity‐type variables.