Le Pont De Londres: Interactions between Monetary and Prudential Policies in Cross-Border Lending

39 Pages Posted: 17 Jan 2020

See all articles by Matthieu Bussière

Matthieu Bussière

Banque de France

Bob Hills

Bank of England - International Finance Division

Simon Lloyd

Bank of England

Baptiste Meunier

Banque de France

Justine Pedrono

French Banking Supervisory Authority - Autorité de Contrôle Prudentiel et de Résolution (ACPR)

Dennis Reinhardt

Bank of England

Rhiannon Sowerbutts

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: January 10, 2020

Abstract

By combining analysis of two unique confidential datasets, we examine how euro-area (EA) monetary policy and recipient-country prudential policy interact to influence the cross-border lending of French banks from France and the UK. We find that monetary spillovers via cross-border lending can be partially offset by prudential measures in receiving countries. We then explore heterogeneities in that interaction, specifically the difference made by bank size and location of the affiliate (French headquarters vs. affiliates based in the UK, an international financial centre). Focusing on lending from France, we find that the response of GSIBs’ lending to EA monetary policy is less sensitive to recipient-country prudential policy than non-GSIBs’. In contrast, the response of lending to EA monetary policy from French-owned GSIB affiliates in the UK is sensitive to recipient-country prudential policy. We also find evidence that French GSIBs channel funds towards the UK in response to EA monetary policy, in a manner that is dampened by the global prudential policy setting. Together, these findings suggest the existence of a ‘London Bridge’: conditional on EA monetary policy, French GSIBs adjust their funds in the UK in response to global prudential policies and, from there, lend to third countries, responding to local prudential policies. French GSIBs’ cross-border lending from their headquarters to EA monetary policy responds differently to foreign prudential policies than their lending from international financial centres. Finally, we find evidence of a similar pattern for all EA-owned bank affiliates in the UK, suggesting a broader relevance of the London Bridge.

Keywords: cross-border bank lending, monetary policy, prudential policy, policy interactions, spillovers, financial centre

JEL Classification: F34, F36, F42, G18, G21, E52

Suggested Citation

Bussiere, Matthieu and Hills, Bob and Lloyd, Simon and Meunier, Baptiste and Pedrono, Justine and Reinhardt, Dennis and Sowerbutts, Rhiannon, Le Pont De Londres: Interactions between Monetary and Prudential Policies in Cross-Border Lending (January 10, 2020). Bank of England Working Paper No. 850, January 2020. Available at SSRN: https://ssrn.com/abstract=3520666 or http://dx.doi.org/10.2139/ssrn.3520666

Matthieu Bussiere

Banque de France ( email )

Paris
France

Bob Hills (Contact Author)

Bank of England - International Finance Division ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Simon Lloyd

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://https://sites.google.com/view/splloyd

Baptiste Meunier

Banque de France ( email )

Paris
France

Justine Pedrono

French Banking Supervisory Authority - Autorité de Contrôle Prudentiel et de Résolution (ACPR) ( email )

Paris
France

HOME PAGE: http://https://sites.google.com/site/justinepedrono/

Dennis Reinhardt

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Rhiannon Sowerbutts

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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