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Monetary Policy and Global Banking

Falk Bräuning and Victoria Ivashina

Journal of Finance, 2020, vol. 75, issue 6, 3055-3095

Abstract: When central banks adjust interest rates, the opportunity cost of lending in local currency changes, but—absent frictions—there is no spillover effect to lending in other currencies. However, when equity capital is limited, global banks must benchmark domestic and foreign lending opportunities. We show that, in equilibrium, the marginal return on foreign lending is affected by the interest rate differential, with lower domestic rates leading to an increase in local lending, at the expense of a reduction in foreign lending. We test our prediction in the context of changes in interest rates in six major currency areas.

Date: 2020
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https://doi.org/10.1111/jofi.12959

Related works:
Working Paper: Monetary Policy and Global Banking (2017) Downloads
Working Paper: Monetary policy and global banking (2016) Downloads
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