Foreign-borne Interest Rate Risk

Abstract

Interest rates on foreign deposits (deposits in the foreign offices of US banks) are more sensitive to US monetary policy than domestic deposit rates. This results in larger deposit betas on foreign deposits. Large foreign deposit betas can be accounted for by (i) the uninsured treatment of foreign deposits and (ii) foreign deposit rates' additional sensitivity to non-US monetary policy. Foreign deposit betas are large enough for the share of foreign deposits to affect the risk profile of US banks and the banking sector.  At the bank level, this is evidenced by US banks with high foreign deposit shares having stock prices that are more sensitive to US monetary policy. In aggregate, VAR-based simulations show that the foreign deposit share meaningfully affects the interest rate sensitivity of the banking sector.

Keywords: Deposit beta, Eurodollars, Global banks, International spillovers JEL Classifications: E52

JEL Classification: E52, E58, F30, F34, G21