Cross-border banking and global liquidity

We investigate global factors associated with bank capital ows. We formulate a model of the international banking system where global banks interact with local banks. The solution highlights the bank leverage cycle as the determinant of the transmission of nancial conditions across borders through banking sector capital ows. A distinctive prediction of the model is that local currency appreciation is associated with higher leverage of the banking sector, thereby providing a conceptual bridge between exchange rates and nancial stability. In a panel study of 46 countries, we nd support for the key predictions of our model.