Reproduction permitted only if source is stated. ISBN Non-technical summary
Research QuestionIn response to the global financial crisis, the Federal Reserve Bank (Fed ) established several emergency facilities during the period from December 2007 to April 2010 peaking at USD 1.2 trillion at the end of 2008. The emergency facilities aimed at lifting liquidity constraints and mitigating bank lending contraction. Funds from the emergency facilities were accessible to U.S. banks as well as subsidiaries of foreign banks. The latter are parts of internal capital markets of internationally active bank holding companies (IBHCs). This study asks whether unconventional U.S. monetary policy in terms of emergency facilities transmitted to banking markets outside the U.S. and changed interest rate setting behavior.
ContributionWith this analysis, we contribute to the literature on the cross-border transmission of monetary policy by examining the link between the Fed emergency facilities and the legal framework in which non-U.S. banks have access to them. The study employs detailed information on the use of emergency liquidity of U.S. banks that had not been available prior to 2011 due to restrictions by the Fed. The data allow us to differentiate between German banks with access to the U.S. liquidity support and banks without access. Our approach compares interest rates of both groups of banks during the period in which the emergency facilities were active and the surrounding period.
ResultsWe find a significant, contemporaneous decline in the short-term deposit rates of banks with access to the U.S. liquidity facilities compared to banks without access to these funding sources. Banks with access to these facilities show significantly decreased shortterm funding costs, while both credit pricing and lending volumes remain unchanged. Short-term corporate loan rates decline as well with a lag between two to four months. These spillover effects of U.S. monetary policy are confined to short-term rates.
AbstractWe show that emergency liquidity provision by the Federal Reserve transmitted to non-U.S. banking markets. Based on manually collected holding company structures of international banks, we can identify banks in Germany with access to U.S. facilities via internal capital markets. Using proprietary interest rate data reported to the German central bank, we compare lending and borrowing rates of banks with and without such access. U.S. liquidity shocks cause a significant decrease in the short-term funding costs of German banks with access. Short-term loan rates charged to German corporates also decline, albeit with lags between two and four months. These spillover effects of U.S. monetary policy are confined to short-term rates.