The Effect of U.S. Stress Tests on Monetary Policy Spillovers to Emerging Markets

42 Pages Posted: 27 Nov 2019

See all articles by Emily Liu

Emily Liu

Board of Governors of the Federal Reserve System

Friederike Niepmann

Board of Governors of the Federal Reserve System; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Tim Schmidt-Eisenlohr

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: 2019

Abstract

This paper shows that monetary policy and prudential policies interact. U.S. banks issue more commercial and industrial loans to emerging market borrowers when U.S. monetary policy eases. The effect is less pronounced for banks that are more constrained through the U.S. bank stress tests, reflected in a lower minimum capital ratio in the severely adverse scenario. This suggests that monetary policy spillovers depend on banks' capital constraints. In particular, during a period of quantitative easing when liquidity is abundant, banks are more flexible, and the scope for adjusting lending is larger when they have a bigger capital buffer. We conjecture that bank lending to emerging markets during the zero-lower bound period would have been even higher had the United States not introduced stress tests for their banks.

Keywords: U.S. bank lending, stress tests, emerging markets, monetary policy spillovers

JEL Classification: E440, F310, G150, G210, G230

Suggested Citation

Liu, Emily and Niepmann, Friederike and Schmidt-Eisenlohr, Tim, The Effect of U.S. Stress Tests on Monetary Policy Spillovers to Emerging Markets (2019). CESifo Working Paper No. 7955. Available at SSRN: https://ssrn.com/abstract=3493667

Emily Liu (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

Friederike Niepmann

Board of Governors of the Federal Reserve System ( email )

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

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Tim Schmidt-Eisenlohr

Board of Governors of the Federal Reserve System ( email )

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

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