When the U.S. Federal Reserve changes interest rates, which banks transmit those shocks more strongly to the rest of the world? Conventional wisdom suggests foreign-owned banks should be more sensitive because they belong to multinational banking groups. Our evidence, based on more than 2,000 banks across 116 countries, suggests a different conclusion: ownership alone is not a reliable predictor of how international monetary shocks affect bank lending.

Geopolitical risk not only affects bank lending; it also weakens deposit growth, limiting banks’ ability to support economic activity. The findings highlight an increasingly important source of vulnerability for financial systems in emerging economies.

In this new blog post, we present the main findings of our recent working paper, “Climate Hazards Meet Overpriced Cities: Linking Environmental Risks to Real Estate Markets Across the Globe”, in which we analyze how climate risks influence housing affordability worldwide, using the price-to-income (PTI) ratio as a key measure.

We are pleased to share a new publication in the academic journal Applied Economics, entitled “R&D investment and financial stability”, authored by Carlos Giraldo, Iader Giraldo, Jose E. Gomez-Gonzalez, and Jorge M. Uribe.

Capital acts as a safeguard that enables banks to endure shocks that might otherwise trigger distress episodes. The level of capital a bank maintains shapes its incentives to manage risks responsibly and determines its capacity to absorb losses during adverse economic conditions.

Our recent FLAR working paper, “Government Debt Expansion and Bank Capitalization: The Conditioning Role of Institutional Quality,” explores how banks’ capital ratios respond to government debt-to-GDP shocks and how this response varies with regulatory quality. Bank capital is a central element of financial stability, and its cyclical behavior has received considerable attention in the macroprudential literature. While earlier studies show that adjustments in capital buffers depend strongly on institutional strength and regulatory design, a parallel body of research examines the interplay between fiscal conditions and banking stability.

The pandemic was not only a health crisis; it also transformed the macroeconomic landscape of the region. In our new blog, we present the results of our recent research, in which we analyze how expansions in public spending during and after COVID-19 contributed to the increase and persistence of inflation in several Latin American countries.

The study finds that increases in public debt tend to reduce bank capital, but the size and timing of the adjustment depend on institutional quality. In strong regulatory systems the impact is immediate and later reverses, while in weaker environments the adjustment is slower.

The study shows that although bank capital ratios in emerging economies were procyclical before 2014, over the past decade they have become less cyclical or even countercyclical. Banks with larger capital buffers respond better during downturns, and regions such as Latin America, developing Asia, and the Middle East show the greatest improvements, reflecting the growing influence of macroprudential regulation.