Global Bank Branches and Financial Stability How Do Global Bank Branches Amplify Financial Shocks?

This paper highlights the growing significance of global bank ‘branches’ in the context of financial stability and analyzes the potential risks each local economy may face. Motivated by empirical evidence from a panel of primarily European economies for 2015-2020, I propose a small open economy DSGE model which to the best of my knowledge is the first to distinguish between ‘domestic banks’ and ‘global bank branches’. These banks have distinctive features but are intimately connected through currency swaps. My model predicts that global bank branches amplify the effect of financial shock, which is a sudden deterioration in domestic banks’ soundness, by exacerbating the liquidity crunch. Importantly, central bank’s monetary policy and conventional credit market intervention are insufficient to assure financial stability in this situation. These predictions provide a rationale for the need to counter the systemic vulnerabilities arising from global bank branches through macroprudential policies