Global liquidity, global risk appetite, and the risk of credit and asset booms

Abstract

This study examines the channels through which net cross-border bank flows and VIX, working through the domestic banking system, could potentially lead to the creation or exacerbation of credit and asset booms that may threaten financial stability. It uses bank firm-level data for the Philippines over the period 1991-2018. Among the study’s significant findings are the following: bank lending to the real estate and housing sector is consistently and significantly affected by net cross-border bank flows (NCBF); non-core bank liabilities is an important variable as it consistently affects the amount of total loans and loans to the commercial and industrial sector as well as bank asset growth and bank leverage; net cross-border flows lower bank asset growth; and banks’ cost of loans tends to be reduced by NCBF and by a reduction in global risk appetite. The use of macroprudential measures-including monitoring bank non-core liabilities and lending to sectors such as real estate-as well as capital flow management measures is warranted in order to prevent bank credit and asset booms from being created or exacerbated, which may threaten growth and financial stability. 

JEL classification: E4, E5, E6, F3, F4, F6