Cross-Border Bank Flows and Monetary Policy

Correa, Ricardo; Paligorova, Teodora; Sapriza, Horacio; Zlate, Andrei

doi:10.17016/IFDP.2018.1241

Working Paper

Cross-Border Bank Flows and Monetary Policy

Abstract: We analyze the impact of monetary policy on bilateral cross-border bank flows using the BIS Locational Banking Statistics between 1995 and 2014. We find that monetary policy in the source countries is an important determinant of cross-border bank flows. In addition, we find evidence in favor of a cross-border bank portfolio channel. As relatively tighter monetary conditions in source countries erode the net worth and collateral values of domestic borrowers, banks reallocate their claims toward safer foreign counterparties. The cross-border reallocation of credit is more pronounced for banks in source countries with weaker financial sectors, which are likely to be more risk averse. Lastly, the reallocation is directed toward borrowers in safer countries, such as advanced economies or economies with an investment grade sovereign rating. By highlighting the effect of domestic monetary policy on foreign credit, this study enhances our understanding of the monetary policy transmission mechanism through global banks.

Keywords: Bank lending; Cross-border bank flows; Monetary policy; Portfolio rebalancing;

JEL Classification: E52; F34; F36; G21;

https://doi.org/10.17016/IFDP.2018.1241