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“Global Banking Glut and Loan Risk Premium”

David Levey has sent me a new paper by Princeton University economics professor Hyun Song Shin on “Global Banking Glut and Loan Risk Premium“. I have unfortunately not had the time to read the paper yet, but it looks quite interesting and I would like to share it with my readers.

Here is the abstract:

“European global banks intermediating US dollar funds are important in influencing credit conditions in the United States. US dollar-denominated assets of banks outside the US are comparable in size to the total assets of the US commercial bank sector, but the large gross cross-border positions are masked by the netting out of the gross assets and liabilities. As a consequence, current account imbalances do not reflect the influence of gross capital flows on US financial conditions. This paper pieces together evidence from a global flow of funds analysis, and develops a theoretical model linking global banks and US loan risk premiums. The culprit for the easy credit conditions in the United States up to 2007 may have been the “Global Banking Glut” rather than the “Global Savings Glut””

Overall, I think the global financial linkages are extremely important in understanding how the Great Recession has played out and Hyun Song Shin’s paper could help us understand these linkages. I am personally very interested in the impact of the European banking sector’s demand for dollar.

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PS While the European crisis continues relentlessly it is hard to find anything positive of cheer you up. However, my colleague Antero Atilla – who long ago has realised that I am obsessed with monetary policy suggested a more fun youtube link today…have a look – it is all about money!

PPS The European crisis, business traveling and a bad flu is likely to keep me a bit away from blogging in the coming days.

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