What are the benefits and costs of hosting foreign banks for an emerging market economy? Matching Mexico’s credit registry to customs records and bank balance sheets, we show that foreign-owned banks lend disproportionately to exporters, raise more of their funding through cross-border and wholesale markets, and cut credit by more than domestic banks when US monetary policy tightens. To analyze the aggregate implications, we build a quantitative small open economy model with two banking sectors, in which foreign banks have a comparative advantage in raising wholesale funding and enhancing the productivity of the exporters they lend to. In the calibrated model, the presence of foreign banks raises steady-state consumption by about 1.2% relative to an economy without them. The gain comes from the enhanced productivity of exporters; cheaper funding alone does not offset the associated interest and dividend payments abroad. The cost is greater exposure to foreign interest rate shocks: the cumulative consumption decline over the two years following a US tightening is less than one tenth larger than in an economy without foreign banks. Regulation that caps banks’ net short dollar positions helps contain this exposure by limiting net worth losses when the peso depreciates. Taken together, our results suggest that the trade-off favors hosting foreign banks, particularly when bank regulation is in place.
"On the Fragility of Mediation: Theory and Experimental Evidence" (with Alessandra Casella and Evan Friedman)
“Global Financial Comovement: The Roles of Integration and Fragmentation” (with Andrés Fernández and Andrea Presbitero, IMF)
“The Life Cycle of Banks: Efficiency, Leverage, and Credit Policy in Colombia, 1924–1989”
"Open Economy Macroeconomics for Latin America: The Lives and Afterlives of Carlos F. Diaz-Alejandro" (draft available upon request)
"Capital Controls and Market Perceptions: Insights from an Investor Survey" (with Apoorv Bhargava, Romain Bouis, Annamaria Kokenyne, Umang Rawat and Ratna Sahay). Published in Shocks and Capital Flows: Policy Responses in a Volatile World, edited by Gaston Gelos and Ratna Sahay, Washington, DC : International Monetary Fund, 2023.
"Capital Controls in Times of Crisis – Do They Work?" (with Apoorv Bhargava, Romain Bouis, Annamaria Kokenyne, Umang Rawat and Ratna Sahay). Published in Shocks and Capital Flows: Policy Responses in a Volatile World, edited by Gaston Gelos and Ratna Sahay, Washington, DC : International Monetary Fund, 2023. Also published as IMF Working Paper No. 2023/067, March 2023
"Do Capital Controls Limit Inflow Surges?" (with Apoorv Bhargava, Romain Bouis, Annamaria Kokenyne, Umang Rawat and Ratna Sahay). Published as IMF Working Paper No. 2023/050, March 2023
"Climate-Related Stress Testing: Transition Risk in Colombia" (with Can Sever). Published as IMF Working Paper No. 2021/261, November 2021
"Insuring Against Climatic Disasters: Can Catastrophe Bonds Help Close the Protection Gap?" (with Alan Feng). Last Draft December 2021, available upon request.