Monetary Policy and Global Banking

51 Pages Posted: 29 Jun 2016 Last revised: 25 Dec 2016

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

Global banks use their global balance sheets to respond to local monetary policy. However, sources and uses of funds are often not denominated in the same currency. This leads to an FX exposure that banks need to hedge. If cross-currency flows are large, the hedging cost increases diminishing the return on lending in foreign currency. We show that, in response to domestic monetary policy easing, global banks increase their foreign reserves in currency areas with the highest rate, while decreasing lending in these markets. We also find an increase in FX hedging activity and its rising cost, as manifested in violations of covered interest rate parity.

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). 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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