The International Bank Lending Channel of Monetary Policy Rates and QE: Credit Supply, Reach-for-Yield, and Real Effects

The Effect of Central Bank Liquidity Injections on Bank Credit Supply

“…The evidence is consistent with the recent literature on the risk-taking channel of monetary policy showing that a lower overnight interest rate induces low-capital banks to grant more loan applications to ex ante risky firms (Jimenez et al (2014), Paligorova and Santos (2013)) and a decline in foreign monetary policy rates and an expansion in quantitative easing lead to a higher credit supply for ex-ante riskier borrowers (Morais et al (2015)). …”

A Global Lending Channel Unplugged? Does U.S. Monetary Policy Affect Cross-border and Affiliate Lending by Global U.S. Banks?

“…Flows through foreign affiliates expose U.S. banks to country risk and transfer risk more than cross-border flows, and can transmit host country financial shocks back to the U.S. through the financial connections of the affiliates to their U.S. parents. Previous papers found a strong positive impact of U.S. monetary easing on the foreign affiliate flows of U.S. banks in both the pre-crisis (Cetorelli and Goldberg (2012a)) and post-crisis (Morais et al (2017)) periods. Theory would predict that due to their lower fixed setup costs, cross-border flows are easier and quicker to adjust in response to funding shocks which affect parent banks.…”

“…Comparing the pre-versus post-crisis periods using a difference-indifference approach, Cetorelli and Goldberg (2012a) for example document that the crisis caused a more severe lending contraction by liquidity-constrained banks. Morais et al (2017) show the expansionary effect of U.S. quantitative easing on the lending of U.S. banks through foreign affiliates. We study the impact of quantitative easing on cross-border flows while carefully controlling for changes in timevarying demand-side conditions throughout and in the aftermath of the financial crisis.…”

“…See also He andMcCauley (2013), Lo Duca et al (2014), Bruno and Shin (2015), Cerutti et al (2015) and McCauley et al (2015). And focusing on individual "recipient" countries, Ioannidou et al (2015) assess if changes in the U.S. federal funds rate have compositional effects on the supply of U.S. Dollar denominated credit granted in Bolivia (an almost entirely dollarized country), Coleman et al (2014) study the flows of non-U.S. affiliate private banks in Brazil, Morais et al (2017) assess the impact of foreign monetary policies on lending by foreign versus domestic banks in Mexico, and Ongena et al (2015) study the differential impact of domestic and foreign monetary policy on the local supply of bank credit in domestic and foreign currencies in Hungary. However these papers do not assess -as we do -the impact of a domestic monetary policy on the supply of cross-border and affiliate credit abroad by many individual banks across many different countries (see recently Jung on risk-taking in cross-border syndicated lending).…”

Financial Globalization and Bank Lending: The Limits of Domestic Monetary Policy?

“…Temesvary et al (2015) find that global US banks respond to both domestic and host countries' (Hungarian) monetary policy through cross-border flows via external capital markets from the US to non-affiliates in the host countries, and such "global bank lending channel" generates a spillover effect of US monetary policy to foreign economies. Morais et al (2015) show that foreign banks transmit foreign monetary policy to Mexico by increasing the loan supply to local borrowers when foreign monetary policy is soft. Krogstrup and Tille (2015) study the role of the Swiss franc in both bank lending and funding across European countries.…”