The Impact of Foreign Banks on Monetary Policy Transmission: Evidence from the Bank-Level Panel Data in Korea

35 Pages Posted: 15 Feb 2015

See all articles by Bang Nam Jeon

Bang Nam Jeon

Drexel University - Department of Economics & International Business; Drexel University-School of Economics

Hosung Lim

The Bank of Korea; Bank of Korea - Economic Research Institute

Ji Wu

affiliation not provided to SSRN

Date Written: February 15, 2015

Abstract

This paper examines the impact of foreign banks on the monetary policy transmission mechanism in the Korean economy during the period from 2000 to 2012, with a specific focus on the lending behavior of banks with different types of ownership. The recent global financial crisis of 2008-2009 provides a case for the first significant test for evaluating the stabilizing/destabilizing role of foreign banks in an emerging Asian economy, Korea, after experiencing a steady increase in foreign ownership in its banking sector. Using the bank-level panel data of the banking system in Korea, we present consistent evidence on the buffering impact that the foreign banks on the effectiveness of the monetary policy transmission mechanism in Korea from the bank-lending channel perspective during the global financial crisis of 2008-2009. Our further analyses show that this buffering effect is mostly driven by foreign bank branches whose parent banks are located in the U.S. One of the underlying reasons for the buffering effect by foreign bank branches including U.S. bank branches is the existence of internal capital markets operated by multinational banks to overcome capital market frictions faced when the foreign banks finance their loans. Our findings suggest an important policy implication for policy-makers as well as banking regulators in Korea that, when the Bank of Korea conducts monetary policies -- expansionary or contractionary -- during crisis periods to bail them out from the credit crunch and spillover effects of financial shocks from abroad, it must take into account the buffering or hampering effects of foreign banks on the effectiveness of the monetary policy transmission mechanism.

Keywords: foreign banks, monetary policy transmission, financial crisis

JEL Classification: G21, E52, G01

Suggested Citation

Jeon, Bang Nam and Lim, Hosung and Wu, Ji, The Impact of Foreign Banks on Monetary Policy Transmission: Evidence from the Bank-Level Panel Data in Korea (February 15, 2015). Asian Finance Association (AsianFA) 2015 Conference Paper, Available at SSRN: https://ssrn.com/abstract=2565265 or http://dx.doi.org/10.2139/ssrn.2565265

Bang Nam Jeon (Contact Author)

Drexel University - Department of Economics & International Business ( email )

3141 Chestnut St.
Philadelphia, PA 19104
United States

Drexel University-School of Economics ( email )

3141 Chestnut St.
Philadelphia, PA 19104
United States

Hosung Lim

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

Ji Wu

affiliation not provided to SSRN

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