International financial services: determinants of banks' foreign assets held by non-banks

Abstract

This paper investigates the determinants of banks' assets held by non-banks for Germany, Japan, the United Kingdom and the United States. As such it represents a departure from traditional studies in that the specific issues underlying international bank flows with non-banks have previously been largely ignored. Banks' foreign assets held by non-banks arc analyzed and discussed using a portfolio balance model. The empirical results of this model suggest a positive relationship with foreign direct investment in banking and banks' foreign assets held by non-banks Other significant factors identified include bilateral trade, the value of national income, and the real interest rate differential. Furthermore, banks' foreign assets held by non-banks arc found to be significantly related to the respective level of interbank dealings such that a restriction on the overall amount of activities exists. Finally, global bank flows of opposite directions arc found to be positively correlated, highlighting the fact that the perceived risk of foreign lending is reduced by simultaneous increases in banks' foreign liabilities.