Monetary Policy and Global Banking
74 Pages Posted: 29 Jun 2016 Last revised: 9 Feb 2020
Date Written: December 23, 2016
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: Suggested Citation