Transmission of monetary policy through global banks: whose policy matters?

Summary

Focus

This paper examines how monetary policy changes in various countries affect international bank lending. Most of the existing literature looks at monetary conditions in one or two countries, that of the lender or that of the borrower. But when banks lend across borders, they do so mostly in a global currency (US dollars or euros), which may be neither the lender's nor the borrower's home currency. Do interest rates in a third country also affect the volume of bank lending between the two countries?

Contribution

We examine the effect of three countries' monetary policies at the same time to determine whose policy matters for international bank lending. The data we use tracks banks in 32 countries and their lending to 55 countries from quarter to quarter since 2000. The way we measure how banks respond to changes in interest rates builds on the joint initiative of the International Banking Research Network.

Findings

We find that all three policies affect international bank lending. When US interest rates fall, cross-border bank lending in dollars tends to increase outside the United States. By contrast, monetary easing in the lender or the borrower country reduces cross-border lending. Similar results, but weaker, hold for bank lending in euros. Overall, the findings suggest that monetary policies spill over across countries and currencies.

Abstract

This paper explores the basic question of whose monetary policy matters for banks' international lending. In the international context, monetary policies from several countries could come into play: the lender's, the borrower's, and that of a third country, the issuer of the currency in which cross-border lending is denominated. Using the rich dimensionality of the BIS international banking statistics, we find significant effects for all three policies. US monetary easing fuels cross-border lending in US dollars, as befits a global funding currency. At the same time, a tightening in the lender or the borrower country reinforces international dollar lending as global banks turn to the greenback for cheaper funding and toward borrowers abroad. Our results also show that stronger capitalization and better access to funding sources mitigate the frictions underpinning the transmission channels. Analogous results for euro-denominated lending confirm that global funding currencies play a key role in international monetary policy transmission.

JEL classification: E59, F42, G21

Keywords: international banking, dollar lending, global funding currency, monetary policy transmission, international spillovers