Monetary Policy Spillovers and Wholesale Funding Shocks in Global Bank Subsidiaries

Abstract

It is well known that contractionary monetary policy (MP) in global bank headquarters’ countries degrades head office balance sheets, potentially damaging investor confidence in the entire conglomerate, including foreign subsidiaries. Supporting this argument, we show that foreign subsidiaries in Mexico face liquidity shocks due to reduced access to local wholesale funding following MP tightening in the headquarters’ economies, especially in the uncollateralized segment that is more exposed to confidence undermining. Additionally, we analyze the implications for global banks’ internal liquidity flows, as headquarters and foreign subsidiaries simultaneously would require funding from each other following contractionary MPs in their home countries.

Keywords: Global banking, subsidiaries, foreign monetary policy, wholesale funding, cross-border flows

JEL Classification: E52, F36, F42, G15, G21