Foreign Banks and International Transmission of Monetary Policy: Evidence from the Syndicated Loan Market

53 Pages Posted: 10 Jan 2017

See all articles by Asli Demirgüç-Kunt

Asli Demirgüç-Kunt

World Bank

Bálint L. Horváth

University of Arizona - Eller College of Management

Harry Huizinga

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR)

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Date Written: January 9, 2017

Abstract

This paper uses loan-level data from 124 countries over 1995-2015 to examine the transmission of monetary policy through the cross-border syndicated loan market. The results show that the expansion of monetary policy increases cross-border credit supply especially to weaker firms. However, greater foreign bank presence in the borrower country appears to reduce the potentially destabilizing impact of lower policy interest rates on cross-border lending, as it attenuates increases in loan volume and maturity while magnifying increases in collateralization and covenant use. The mitigating effect of foreign banking presence in the borrowing country on the transmission of monetary policy is robust to controlling for borrower-country economic and financial development, and a range of borrower and lender country policies and institutions, including the strength of bank regulation and supervision, exchange rate flexibility, and restrictions on capital flows. The findings qualify the characterization of international banks as sources of credit instability, and suggest that foreign bank entry can improve the stability of cross-border credit in the face of international monetary policy shocks.

Keywords: Economic Conditions and Volatility

Suggested Citation

Demirgüç-Kunt, Asli and Horváth, Bálint L. and Huizinga, Harry, Foreign Banks and International Transmission of Monetary Policy: Evidence from the Syndicated Loan Market (January 9, 2017). World Bank Policy Research Working Paper No. 7937, Available at SSRN: https://ssrn.com/abstract=2896513

Asli Demirgüç-Kunt (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Bálint L. Horváth

University of Arizona - Eller College of Management ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Harry Huizinga

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2623 (Phone)
+31 13 466 3042 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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