Le Pont de Londres: Interactions Between Monetary and Prudential Policies in Cross-Border Lending

40 Pages Posted: 31 Jan 2020

See all articles by Matthieu Bussière

Matthieu Bussière

Banque de France

Robert Hills

Bank of England

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 2020

Abstract

We examine how euro area (EA) monetary policy and recipient-country prudential policy interact to influence cross-border lending of French banks. We find that monetary spillovers via cross-border lending can be partially offset by prudential measures in receiving countries. We then explore heterogeneities, specifically by bank size and location of the affiliate (French HQ vs. affiliates based in the UK). We find that the response of lending from French HQ to EA monetary policy is less sensitive to recipient-country prudential policy for systemic banks (GSIBs) than for non-GSIBs’. In contrast, the response of lending from GSIBs’ affiliates in the UK is sensitive to recipient-country prudential policy. French GSIBs’ cross-border lending from French HQ responds differently than lending from international financial centres. We also find evidence that French GSIBs channel funds towards the UK in response to EA monetary policy, in a manner dampened by global prudential policy setting. These findings suggest the existence of a ‘London Bridge’: conditional on EA monetary policy, French GSIBs adjust their funds in the UK depending on global prudential policies and, from there, lend to third-party countries according to local prudential policies. Finally, we have similar findings for all EA-owned banks UK affiliates, suggesting a broader relevance for the London Bridge.

Keywords: Monetary Policy, Prudential Policy, Policy Interactions, Spillovers, Financial Centre

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

Suggested Citation

Bussiere, Matthieu and Hills, Robert 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 2020). Banque de France Working Paper No. #753. Available at SSRN: https://ssrn.com/abstract=3528051 or http://dx.doi.org/10.2139/ssrn.3528051

Matthieu Bussiere (Contact Author)

Banque de France ( email )

Paris
France

Robert Hills

Bank of England ( 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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