Foreign currency bank funding and global factors

Cédric TILLE

The literature on the drivers of international capital flows establishes the importance of global financial risk factors. However, the cross country and time variation in the sensitivity of capital flows to global factors is substantial and not well understood. We present a portfolio balance model suggesting that the foreign currency mismatch on financial institutions' balance sheets determine the size and sign of these institutions' cross border flows in response to global risk factors. Testing the model for European banks' net foreign currency funding flows yields supporting evidence, especially for countries that are not members of the euro area.