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Let me pick up from exactly that question.
I showed you so far was the evidence we had on home currency bias really
shaping investor portfolios.
And so now what we want to do is basically get into what's the implication of that.
So how exactly does this affect the allocation of capital to firms within and
across countries.
So the kind of easiest way to get started on seeing this is literally just to say,
how does the currency composition of a firm's debt just knowing
how much a firm borrows and foreign currency?
How much does that tell you about how much a firm
has borrowed from foreign investors?
And so if you look in, let's look at the Canada graph again.
On the x axis and of the labeling is small,
this is the share of any firm's debt in foreign currency.
Each bubble is a particular firm
the size of the bubble gives you the size of how much they borrowed.
So if a firm is basically at the origin that's saying that they borrowed,
they have none of their debt and
foreign currency 100% of it is in Canadian dollars.
the y axis then just says, well, how much of that firm's debt is actually owned by
foreigners Aad what you can see is that it's basically a 45 degree line.
That knowing how much of a firm's debt is in foreign currency for
Canada essentially tells you how much of their
financing is coming at least from bonds, is coming from foreign investors.
And you see something very, very similar for the Euro area and Great Britain.
Things look a little bit different for the United States.
Here, when you see that big cloud in the lower right.
The lower panel for
the US, you'll see a bunch of firms that have none of their debt and
foreign currency, which means that they have all of their debt in US dollars.
Yet you see a big dispersion in how much of their financing comes from
foreigners and so what you can see here is that the US looks a little bit different.
Now even with that said, American firms that borrow more in foreign currency
tend to get more of their capital from foreign investors.
Now, you might think, okay, this isn't going to matter for
which firms the ability of firms to get foreign financing.
If we were in a frictionless world and home currency bias was there so
investors all demanded to lend in their own currency.
You would imagine,
okay, I'm a Canadian firm I want to borrow from British households.
I'm going to issue a bond in British pounds,
satisfying the investors home currency bias.
And I'll costlessly hedge that back into Canadian dollars, or
I'll bear the currency risk and
if it's frictionless, I'll basically cater to every market.
And I can borrow from every type of investor and
satisfy their preferences without any resources.
However, when you actually plot and what this is showing
is the number of currencies that a firm borrows in on the x-axis.
And every dot here is different firm, sorry,
on the y-axis on the x-axis is the issuers rank and total borrowing.
So the bigger firms on the left, what you see is that overwhelmingly
firms borrow in very few currencies, mostly they just borrow in one their own.
It's only the largest firms that are actually going to borrow
in foreign currency.
And because everything we've shown about home currency bias means that
if you're not borrowing in an investor's Currency,
you're not going to be getting capital from them.
And so the easiest way to really kind of dig into
the implications of this home currency bias, combined with what looks like.
Tthese graphs are basically showing something that looks like
kind of a fixed cost of issuing that.
Every firm does not borrow in every currencies is to say.
How different does the allocation of capital look when foreign
investors lend to firms then when a firm gets domestic investment?
And so the key here is going to be basically that foreign investors
are going to completely avoid local currency only issue is for Canada.
So this is a complicated graph and so I want to go through very carefully please
do interrupt if something isn't clear.
On the x axis, we sort firms according to the size of their borrowing.
So again, on the left closer to 0 and 1, those are the bigger firms,
we've sorted them according to their size in the domestic portfolio.
On the y axis, it's how much of the domestic portfolio in red or
the foreign portfolio any given firm accounts for.
And so what you can see the red dots are how much of the domestic portfolio
firm accounts for the blue diamonds are how much of the bonds
issued by the same firm show up in foreign portfolios.
On the left, we do this graph for all issuers in Canada so
the top 500 largest Canadian firms that issue bonds.
And so you can see that there's some big differences between
the way the domestic portfolio and the foreign portfolio.
But you can really see the difference between how differently domestic and
foreign investors behave is when you look at the right graph.
Which is you basically we're throwing out from that left panel.
Any Canadian firm that issued a bond in a currency other than the Canadian dollars.
So this only local currency issuers graph is basically saying,
let's only look at the Canadian firms that borrow only in Canadian dollars.
And let's ask how much of the domestic portfolio in red do their bonds account
for versus how much of the foreign portfolio do those same firms account for
in the blue diamonds?
And to which you can see is that some of
these firms that are local currency only, are pretty big.
So the largest, local currency only issue accounts for more than
3% Canada's domestic bond portfolio Canadians investing domestically.
But when you see all those blue diamonds, the foreign portfolio just at zero.
What that means is that all the Canadian firms that are borrowing only in Canadian
dollars are essentially not getting bond finance from foreign investors.
And so the firm's that are borrowing only in Canadian dollars
are essentially only getting domestic bond finance.
What we can then do is make that exact same graph not just for Canada, but
also for the Euro area and Great Britain.
Going back to the earlier question, remarkably, the euro area
firms in the euro area that are issuing in euros, very liquid massive market.
What you see is that there's a tonne of firms that only issue bonds in Euros and
they account for a large fraction of Europeans investment in Europe.
However, even for the Euro area, what you see is that the firms
are only in euros get very little of their financing from foreign investors.
In the lower left make the same picture for Great Britain.
And again, there are plenty of firms that are only in British pounds
that account for a large fraction of the UK investment in itself,
but they're nearly absent from foreign portfolios.
In the bottom right, you can really see the sense in which the US is different.
This is looking only at American firms that borrow only in dollars.
And here you can see that for
the American firms that borrow only in dollars, the share of the domestic and
foreign portfolio they account for is very similar.
So, whereas the Canadian European and British firms that borrow
in the local currency are largely excluded from foreign portfolio bond investment.
That's simply not the case
when it comes to foreign investment in the United States.
Now, the way you can kind of see that, in kind of a single graph,
is basically to add up those red dots.
To say how much of the domestic portfolio, do firms that borrow only in
the local currency account for and compare that to the some of the blue diamonds?
How much of the foreign portfolio do those same firms account for?
And so on the left you can see that American firms that borrow only in
dollars account for 60% The US domestic bond portfolio, but
around 50% of the foreign portfolio.
When you look at any other country local currency only borrowers account for
a huge fraction of the domestic portfolio, but
foreigners are dramatically underweight these local currency firms.
Now, you might say again
while there could be a compositional difference in the firm's, there's
something else that's explaining why a firm would borrow in foreign currency.
And so the way we want to get at that is to say,
well, if there's something different about the local currency only
borrowers that makes them less appealing to foreign investors.
Maybe when we look at whether domestic or foreigners own invest
in these firms in terms of their equity, maybe we'll see a big difference there.
And so here you can think of this as almost a placebo test of do we see
firms that borrow only in the local currency, getting a different
share of a different weight in the domestic and foreign portfolio?
And luckily the answer is No.
Am going to cross countries in the equity, they get the similar allocation,
but when it comes it's really in bonds in currency where we see this big division.
Now so that's kind of the idea that we've shown that the international currency
this issuing of the dollar as the global currency is really going to affect
the nature of capital allocation.
And so in particular, we think this is the kind of a novel benefit of issuing
an international currency.
You can essentially think it's opening the capital account for
local currency only borrowers.
American firms when they want to borrow from foreign investors
they don't have to do anything different.
They have to issue a bond in dollars and
that's already tapping international markets.
Whereas if you think of what firms and other countries have to do when they
want to tap international markets, if they want to cater to foreign investors,
they have to change their currency.
And because it looks like there's a selection,
the size dependent selection in the foreign currency issuance,
this is going to change the set of firms that are actually borrowing.
So now this raises the question
of how much can this international currency use change over time?
And so, a material alluded to this in his introduction when he mentioned kind of
the long history of the international monetary system.
But one remarkable thing that we document,
just looking over this recent period is the extent to which,
the cross border use of currencies has changed just over the last 15 years.
And particular around the global financial crisis and
then the European sovereign debt crisis.
You see a huge change in the share of cross border financing for
corporate bonds that's in dollars versus euros.
And so I think we kind of discussed some reasons why that would be the case.
But fundamentally understanding the drivers of this shift is an important
research question.
Now one of the benefits of having the kind of underlying data is we can really look
at whether this aggregate pattern
is driven by kind of compositional shifts that have little to do with currency.
So we can, I'm not going to go into the details, but
we can kind of Make this exact same graph controlling by entry and exit,
using fixed effects as well as taking out any mechanical valuation effects.
And what's remarkable is even there this huge shift of
cross border finance from euros to dollars kind of stays through.
And going to the earlier question on whether we see something similar
in bank loans.
We look at this using micro data from
on syndicated loan issuance from SCC platinum.
And here we actually can split the type of firm that issue so manufacturing finance,
investment, real estate, trade and services.
And again, we see a very similar pattern of this rise of the dollar and
decline of the euro over the last decade plus.
And so I want to end very shortly
here to make sure there's plenty of time for questions.
But I do think that there's kind of of some big research questions kind of of
still out there?
We showed evidence of this size dependent friction
is something that looks like kind of fixed cost of borrowing in foreign currency.
But what is it?
What is actually driving this size dependent
selection of firms into borrowing in foreign currency?
What is it that would actually prevent a firm from tapping
international capital markets?
What's going to determine investor currency preferences?
What is it about the dollar that makes it kind of the exception to this investor
home currency bias?
And then having documented this kind of huge change in the international use
of currencies.
And kind of what are the real effects of this change in international currencies?
And so that let me stop and make sure we have time for plenty of discussion.
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