Preprint Article Version 1 This version is not peer-reviewed

Relative Contribution of Public Sector, Banking Sector, and Non-Bank Financial Sector Claims in U.S. Global Banks' Exposure to Foreign Counterparties' Default Risks

Version 1 : Received: 14 March 2018 / Approved: 15 March 2018 / Online: 15 March 2018 (04:46:05 CET)

How to cite: Niankara, I.; Ismail, H. Relative Contribution of Public Sector, Banking Sector, and Non-Bank Financial Sector Claims in U.S. Global Banks' Exposure to Foreign Counterparties' Default Risks. Preprints 2018, 2018030113 (doi: 10.20944/preprints201803.0113.v1). Niankara, I.; Ismail, H. Relative Contribution of Public Sector, Banking Sector, and Non-Bank Financial Sector Claims in U.S. Global Banks' Exposure to Foreign Counterparties' Default Risks. Preprints 2018, 2018030113 (doi: 10.20944/preprints201803.0113.v1).

Abstract

This paper relies on accounting-based measures of country risk to investigate U.S. global banks' exposure to foreign country risk over the 2017 fiscal year as measured by the sum of cross-border risk, foreign office risk, and derivative risk claims. We achieve this using panel linear modeling methods with country level heterogeneity and time fixed effects, along with a constructed panel data of 284 observations on 71 countries distributed across 6 world regional blocks, and observed over 4 consecutive quarters starting from 4th quarter 2016 and ending with 3rd quarter 2017. The results show that on average, over the four quarters, a 1% increase in foreign banking sector's claims significantly increases U.S. global banks cross border risk exposure by 0.34%, while reducing derivative risk exposure by 0.22%, but have no significant impact on foreign office risk exposure. Similar results are observed with public sector claims which significantly increase banks' exposure to cross border risk by 0.21%, while reducing derivative risk exposure by 0.19%. Conversely however, non-bank financial sector claims are found to have no significant affect on cross-border risk exposure, but significantly reduce foreign office risk exposure by 0.09%, while increasing derivative risk exposure by 0.06%. These results indicate the presence of sectoral heterogeneities in U.S. banks' exposure to foreign counterparties' risk, and also that overall, over the course of 2017 the level of U.S. global banks' cross-border risk exposure increased, while their level of derivative risk exposure decreased, and the level of foreign office risk exposure remained relatively unchanged.

Subject Areas

bank reporting; country risk; financial stability; panel data modeling

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