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Le Pont de Londres: interactions between monetary and prudential policies in cross-border lending

Matthieu Bussiere (), Robert Hills (), Simon Lloyd, Baptiste Meunier, Justine Pedrono (), Dennis Reinhardt () and Rhiannon Sowerbutts

No 850, Bank of England working papers from Bank of England

Abstract: By combining analysis of two unique confidential datasets, we examine how euro-area (EA) monetary policy and recipient-country prudential policy interact to influence the cross-border lending of French banks from France and the UK. We find that monetary spillovers via cross-border lending can be partially offset by prudential measures in receiving countries. We then explore heterogeneities in that interaction, specifically the difference made by bank size and location of the affiliate (French headquarters vs. affiliates based in the UK, an international financial centre). Focusing on lending from France, we find that the response of GSIBs’ lending to EA monetary policy is less sensitive to recipient-country prudential policy than non-GSIBs’. In contrast, the response of lending to EA monetary policy from French-owned GSIB affiliates in the UK is sensitive to recipient-country prudential policy. We also find evidence that French GSIBs channel funds towards the UK in response to EA monetary policy, in a manner that is dampened by the global prudential policy setting. Together, these findings suggest the existence of a ‘London Bridge’: conditional on EA monetary policy, French GSIBs adjust their funds in the UK in response to global prudential policies and, from there, lend to third countries, responding to local prudential policies. French GSIBs’ cross-border lending from their headquarters to EA monetary policy responds differently to foreign prudential policies than their lending from international financial centres. Finally, we find evidence of a similar pattern for all EA-owned bank affiliates in the UK, suggesting a broader relevance of the London Bridge.

Keywords: Cross-border bank lending; monetary policy; prudential policy; policy interactions; spillovers; financial centre. (search for similar items in EconPapers)
JEL-codes: E52 F34 F36 F42 G18 G21 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2020-01-10
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-opm
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Related works:
Journal Article: Le Pont de Londres: Interactions between monetary and prudential policies in cross‐border lending (2021) Downloads
Working Paper: Le Pont de Londres: interactions between monetary and prudential policies in cross-border lending (2020) Downloads
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