Cross-Border Bank Flows and Monetary Policy

53 Pages Posted: 6 Dec 2018 Last revised: 21 Feb 2019

See all articles by Ricardo Correa

Ricardo Correa

Board of Governors of the Federal Reserve System

Teodora Paligorova

Board of Governors of the Federal Reserve System

Horacio Sapriza

Board of Governors of the Federal Reserve System

Andrei Zlate

Federal Reserve Banks - Federal Reserve Bank of Boston

Date Written: 2018-12-03

Abstract

We analyze the impact of monetary policy on bilateral cross-border bank flows using the BIS Locational Banking Statistics between 1995 and 2014. We find that monetary policy in the source countries is an important determinant of cross-border bank flows. In addition, we find evidence in favor of a cross-border bank portfolio channel. As relatively tighter monetary conditions in source countries erode the net worth and collateral values of domestic borrowers, banks reallocate their claims toward safer foreign counterparties. The cross-border reallocation of credit is more pronounced for banks in source countries with weaker financial sectors, which are likely to be more risk averse. Lastly, the reallocation is directed toward borrowers in safer countries, such as advanced economies or economies with an investment grade sovereign rating. By highlighting the effect of domestic monetary policy on foreign credit, this study enhances our understanding of the monetary policy transmission mechanism through global banks.

Keywords: Bank lending, Cross-border bank flows, Monetary policy, Portfolio rebalancing

JEL Classification: E52, F34, F36, G21

Suggested Citation

Correa, Ricardo and Paligorova, Teodora and Sapriza, Horacio and Zlate, Andrei, Cross-Border Bank Flows and Monetary Policy (2018-12-03). FRB International Finance Discussion Paper No. 1241. Available at SSRN: https://ssrn.com/abstract=3296791 or http://dx.doi.org/10.17016/IFDP.2018.1241

Ricardo Correa (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Teodora Paligorova

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Horacio Sapriza

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Andrei Zlate

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

600 Atlantic Avenue
Boston, MA 02210
United States

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