Cross-Border Bank Flows and Systemic Risk

Using data on cross-border bank flows from Bank for International Settlement (BIS) reporting source countries to 114 recipient countries, we find that heightened bank flows are associated with lower systemic risk in the bank systems in the recipient country. The link between increased flows and reductions in marginal expected shortfall (MES) are concentrated among banks that are larger, profitable, and more efficient. The decline in MES is concentrated among banks in developed markets and those in countries with banking sectors that are larger and have lower capital bases. Additional evidence helps to identify the channels through which cross-border bank flows help to reduce MES, which is by improving recipient-country bank asset quality, efficiency, and profitability. Overall, our findings are consistent with dynamic models of multinational banking that predict lower risk-taking by stimulating local competition and suggest a positive impact of international bank flows on global financial stability.