Testing the global banking glut hypothesis

• The housing boom in the US was fuelled by funding from abroad.
• Funding via foreign banks’ balance sheets had stronger macroeconomic consequences than funding through the securities market.
• At least in the short term funding from abroad improves the stability of the domestic banking system.

This paper presents VAR results on the recent economic history of the U.S. and focuses on the dependence of U.S. macrofinancial variables on international capital flows. Both gross and net flows are included in the analysis. The results indicate that cross-border funding has affected the build-up in the U.S. housing market irrespective of how these flows are defined and measured. Both the savings glut hypothesis and the banking glut hypothesis are supported by these findings. However, net banking flows appear to explain the higher volatility in the increase in house prices as well as the mortgage loan boom.