Summary

The literature traditionally uses US monetary and financial factors as indicators of global financial conditions. This paper explores whether similar European factors also need to be considered when studying the behaviour of cross-border bank flows. Using a longer time series and broader country sample than previous studies, we confirm that flows vary with uncertainty (VIX), US monetary policy (real interest rate and term spread), and US exchange rate. In contrast to the existing literature, we find that US bank conditions are insignificant in explaining flows outside the global financial crisis. European bank conditions (euro-area and UK large bank leverage, or TED spread, the three-month interbank rate minus three-month government bond yield) are, however, important throughout the 2000s, even outside the crisis and when controlling for commonality in global conditions. Taken together, our results suggest that global financial conditions are best captured by US monetary conditions and exchange rate dynamics and European bank conditions. This finding is consistent with the important role of European banks in intermediating cross-border credit, including dollar-denominated credit.

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