Monetary Policy and Global Banking
Foreign ("global") banks play an important role in many countries and use their global balance sheets to respond to local monetary policy. According to the Bank for International Settlements, European and Japanese banks' claims on U.S. nonbank firms as of June 2015 were USD 1.61 and 0.72 trillion, respectively. Foreign banks help originate close to a quarter of all syndicated corporate loans in the United States (DealScan data). Similarly, U.S. banks are important lenders abroad. However, sources and uses of funds are often denominated in different currencies, leading to a foreign exchange (FX) exposure that banks need to hedge. If cross-currency flows are large, the hedging cost increases, diminishing the return on lending in foreign currency.
Given the economic significance of global banks, questions have been raised about their role in the propagation of economic shocks across countries. This paper studies the effect of monetary policy actions in one country on the lending decisions of global banks abroad, in the context of changes in the interest on excess reserves (IOER) rate in six major currency areas between 2000:Q1 and 2015:Q2.