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Foreign Banks and International Transmission of Monetary Policy: Evidence from the Syndicated Loan Market

Asli Demirguc-Kunt, Balint Horvath and Harry Huizinga

No 11796, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper uses loan-level data from 124 countries over 1995–2015 to examine the transmission of monetary policy through the cross-border syndicated loan market. The results show that the expansion of monetary policy increases cross-border credit supply especially to weaker firms. However, greater foreign bank presence in the borrower country appears to reduce the potentially destabilizing impact of lower policy interest rates on cross-border lending, as it attenuates increases in loan volume and maturity while magnifying increases in collateralization and covenant use. The mitigating effect of foreign banking presence in the borrowing country on the transmission of monetary policy is robust to controlling for borrower-country economic and financial development, and a range of borrower and lender country policies and institutions, including the strength of bank regulation and supervision, exchange rate flexibility, and restrictions on capital flows. The findings qualify the characterization of international banks as sources of credit instability, and suggest that foreign bank entry can improve the stability of cross-border credit in the face of international monetary policy shocks.

Keywords: Bank Regulation; Banking FDI; capital controls; Cross-border lending; Monetary Transmission (search for similar items in EconPapers)
JEL-codes: E44 E52 F34 F38 F42 G15 G20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ifn, nep-mac, nep-mon and nep-opm
Date: 2017-01
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