Monetary Policy and Global Banking

74 Pages Posted: 29 Jun 2016 Last revised: 9 Feb 2020

See all articles by Falk Bräuning

Falk Bräuning

Federal Reserve Banks - Federal Reserve Bank of Boston

Victoria Ivashina

Harvard University; National Bureau of Economic Research (NBER)

Date Written: December 23, 2016

Abstract

When central banks adjust interest rates, the opportunity cost of lending in local currency changes, but—in absence of frictions—there is no spillover effect to lending in other currencies. However, when equity capital is limited, global banks must benchmark domestic and foreign lending opportunities. We show that, in equilibrium, the marginal return on foreign lending is affected by the interest rate differential, with lower domestic rates leading to an increase in local lending, at the expense of a reduction in foreign lending. We test our prediction in the context of changes in interest rates in six major currency areas.

Keywords: Global banks; monetary policy transmission; cross-border lending

JEL Classification: E44, E52, F36, G15, G21, G28

Suggested Citation

Bräuning, Falk and Ivashina, Victoria, Monetary Policy and Global Banking (December 23, 2016). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2801304 or http://dx.doi.org/10.2139/ssrn.2801304

Falk Bräuning

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Victoria Ivashina (Contact Author)

Harvard University ( email )

Harvard Business School
Baker Library 233
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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