This paper sheds new light on the degree of international fiscal-financial spillovers by investigating the effect of domestic fiscal policies on cross-border bank lending. By estimating the dynamic response of U.S. cross-border bank lending towards the 45 recipient countries to exogenous domestic fiscal shocks (both measured by spending and revenue) between 1990Q1 and 2012Q4, we find that expansionary domestic fiscal shocks lead to a statistically significant increase in cross-border bank lending. The magnitude of the effect is also economically significant: the effect of 1 percent of GDP increase (decrease) in spending (revenue) is comparable to an exogenous decline in the federal funds rate. We also find that fiscal shocks tend to have larger effects during periods of recessions than expansions in the source country, and that the adverse effect of a fiscal consolidation is larger than the positive effect of the same size of a fiscal expansion. In contrast, we do not find systematic and statistically significant differences in the spillover effects across recipient countries depending on their exchange rate regime, although capital controls seem to play some moderating role. The extension of the analysis to a panel of 16 small open economies confirms the finding from the U.S. economy.

Fiscal stimulus was widely advocated during the global crisis, a period characterized by monetary policy constrained by the effective lower bound (ELB) in many countries, in part because of expected positive spillovers. Standard New Keynesian models predict the cross-border transmission of fiscal shocks is stronger when monetary policy is constrained in recipients. However, the empirical evidence is scarce. This paper bridges this gap by looking at the impact of fiscal shocks in systemic (source) economies on output and demand components in a large group of (recipient) countries, under different monetary policy conditions. Empirical results are compared to simulations with a state-of-the-art estimated open-economy New Keynesian model. Our results corroborate model predictions, finding larger spillovers when recipients are at the ELB, driven by stronger responses of investment and consumption relative to normal times

Global banks played a significant role in transmitting the 2007-09 financial crisis to emerging-market (EM) economies. The authors examine adverse liquidity shocks on main developed-country banking systems and their relationships to EM across Europe, Asia, and Latin Amer., isolating loan supply from loan demand effects. Loan supply in EM across Europe, Asia, and Latin Amer. was affected significantly through three separate channels: (1) a contraction in direct, cross-border lending by foreign banks; (2) a contraction in local lending by foreign banks¿ affiliates in EM; and (3) a contraction in loan supply by domestic banks, resulting from the funding shock to their balance sheets induced by the decline in interbank, cross-border lending. Charts and tables.

Developing an effective framework for cross-border resolution is a key priority in international regulatory reform. Large bank failures during the global financial crisis brought home the lack of adequate tools for resolving “too-big-to-fail” institutions. In cross-border cases, misaligned incentives and lack of robust mechanisms for resolution and cross-border cooperation left some country authorities with little choice but to take unilateral actions, which contributed to the high fiscal costs of the crisis and resulted in disorderly resolution in some cases

The April 2012 Global Financial Stability Report assesses changes in risks to financial stability over the past six months, focusing on sovereign vulnerabilities, risks stemming from private sector deleveraging, and assessing the continued resilience of emerging markets. The report probes the implications of recent reforms in the financial system for market perception of safe assets, and investigates the growing public and private costs of increased longevity risk from aging populations.