Breaking free of the triple coincidence in international finance 1

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1 Eighth IFC Conference on Statistical implications of the new financial landscape Basel, 8 9 September 2016 Breaking free of the triple coincidence in international finance 1 Hyun Song Shin, BIS 1 This presentation was prepared for the meeting. The views expressed are those of the author and do not necessarily reflect the views of the BIS, the IFC or the central banks and other institutions represented at the meeting.

2 Breaking free of the triple coincidence in international finance Stefan Avdjiev, Robert N McCauley and Hyun Song Shin* Bank for International Settlements Panel remarks at the 8th IFC Conference Basel, 9 September 2016 * The views expressed here are mine, not necessarily those of the Bank for International Settlements.

3 Textbook framework for international finance Unit of analysis is national income (GDP) area Economic territory 1 Economic territory 2 Output 1 Output 2 2

4 Traditional approach: GDP boundary defines decision making unit Economic territory 1 Economic territory 2 A L A L 3

5 Triple coincidence 4

6 Triple coincidence can lead one stray Global savings glut Losses from subprime were borne by European banks, not investors from current account surplus countries Wile E. Coyote moment for the dollar Dollar appreciated with the onset of the 2008 crisis Korea in 2008 Current account surpluses and positive net external asset position Yet, Korea was one of those countries hardest hit in crisis 5

7 US dollar-denominated cross-border bank claims In billions of USD 2002 Source: BIS locational banking statistics by residence. 6

8 US dollar-denominated cross-border bank claims In billions of USD 2003 Source: BIS locational banking statistics by residence. 7

9 US dollar-denominated cross-border bank claims In billions of USD 2004 Source: BIS locational banking statistics by residence. 8

10 US dollar-denominated cross-border bank claims In billions of USD 2005 Source: BIS locational banking statistics by residence. 9

11 US dollar-denominated cross-border bank claims In billions of USD 2006 Source: BIS locational banking statistics by residence. 10

12 US dollar-denominated cross-border bank claims In billions of USD 2007 Source: BIS locational banking statistics by residence. 11

13 Currency denomination does not follow the national income boundary: case of non-banks 12

14 Traditional balance of payments boundary may understate external dollar credit Bank Border A L A L Local currency Local currency Local currency US dollars International capital market Non-financial corporation 13

15 US dollar credit to non-bank borrowers including offshore issuance In billions of US dollars Brazil China India 300 1, Loans Debt securities Offshore issuance by country nationals US dollar-denominated loans to non-bank residents of the country listed in the panel titles. For China, locally extended US dollar loans are estimated from national data on total foreign currency loans, assuming 80% are dollar-denominated. 2 Outstanding US dollar debt securities issued by nonfinancial residents of the country listed in the panel title. 3 Outstanding US dollar-denominated bonds issued offshore (ie outside the country listed in the panel title) by non-financials with the nationality listed in the panel title. Sources: BIS locational banking statistics by residency; BIS International Debt Securities Statistics; national sources; authors calculations. 14

16 Challenges for models of international finance General equilibrium models are about GDP components Consumption, investment, But balance sheets do not always follow the GDP boundary Can be messy to have two overlapping partitions of all decision makers in the world Some progress can be made if concern is with global variables Global factors determining economic conditions Global liquidity Risk-taking channel 15