Working Paper: CEPR ID: DP11839
Authors: Julian Di Giovanni; Sebnem Kalemli-Ozcan; Mehmet Fatih Ulu; Yusuf Soner Baskaya
Abstract: This paper studies the transmission of the Global Financial Cycle (GFC) to domestic credit market conditions in a large emerging market, Turkey, over 2003-13. We use administrative data covering the universe of corporate credit transactions matched to bank balance sheets to document four facts: (1) an easing in global financial conditions leads to lower borrowing costs and an increase in local lending; (2) domestic banks more exposed to international capital markets transmit the GFC locally; (3) the fall in local currency borrowing costs is larger than foreign currency borrowing costs due to the comovement of the uncovered interest rate parity (UIP) premium with the GFC over time; (4) data on posted collateral for new loan issuances show that collateral constraints do not relax during the boom phase of the GFC.
Keywords: global financial cycle; bank credit; noncore funding; risk premium; collateral constraints
JEL Codes: E0; F0; F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Easing in global financial conditions (F65) | Lower borrowing costs (G21) |
| Easing in global financial conditions (F65) | Increase in local lending (G21) |
| Fluctuations in VIX (E32) | Cyclical loan growth (E32) |
| Banks more exposed to international capital markets (F65) | Transmit GFC locally (F42) |
| High noncore banks (G21) | Cut lending rates more during boom phases (E52) |
| High noncore banks (G21) | Increase lending more during boom phases (G21) |
| Fall in local currency borrowing costs (H74) | Driven by UIP risk premium (G19) |
| UIP risk premium co-moves with GFC (F44) | Local currency loans cheaper relative to foreign currency loans (F31) |
| Collateral constraints do not relax (D10) | Lack of relationship between loan amounts and posted collateral (G51) |
| Lower interest rates (E43) | More critical for credit expansion than higher collateral values (E51) |