Hostname: page-component-78c5997874-g7gxr Total loading time: 0 Render date: 2024-11-15T20:48:00.615Z Has data issue: false hasContentIssue false
  • English
  • Français

Financial Globalization and Bank Lending: The Limits of Domestic Monetary Policy

Published online by Cambridge University Press:  03 June 2022

Jin Cao Open the ORCID record for Jin Cao [Opens in a new window]  and
Valeriya Dinger
Jin Cao*
Affiliation:
Norges Bank Research Department and CESifo
Valeriya Dinger
Affiliation:
University of Osnabrück Department of Economics and the Leeds University Business School vdinger@uni-osnabrueck.de
*
jin.cao@norges-bank.no (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

Exploring bank-level data from a small open economy, we present evidence that global funding conditions limit the effectiveness of domestic monetary policy in terms of shaping both the volume and the riskiness of bank lending. We show that more favorable global funding conditions associated with a local currency appreciation encourage banks to increase lending, leverage up, take more risks, and thus insulate themselves from lean-against-the-wind domestic monetary policy. These results support the existence of a risk-taking channel of currency appreciation at the bank level.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 8 , December 2022 , pp. 3223 - 3251
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee, Joshua Aizenman, Farooq Q. Akram, André K. Anundsen, Söhnke M. Bartram, Henrik Borchgrevink, Miguel Boucinha, Markus Brunnermaier, Georgia Bush, Anusha Chari, Gianni De Nicolò, Julian di Giovanni, Mark Egan, Falko Fecht, Hans Gersbach, Linda Goldberg, Galina Hale, Jarrad Harford (the editor), Boris Hofmann, Gerhard Illing, Dirk Krueger, Ulrike Neyer, Steven Ongena, Jean-Charles Rochet, Kasper Roszbach, Anjan Thakor, Bent Vale, Francesco Vallascas, Andrea Vedolin, Jürgen von Hagen, and Frank Westermann as well as participants at seminars in Norges Bank, Bank of Lithuania, University of Munich, University of Zurich, Waseda University, 2020 ASSA Annual Meeting in San Diego, 2017 Annual Meeting of the Western Finance Association (WFA), 2019 Deutsche Bundesbank Conference “Financial Intermediation in a Globalized World,” 2017 Annual Meeting of Central Bank Research Association at Bank of Canada, 2017 CESifo Area Conference on Macro, Money and International Finance, 2017 Royal Economic Society Annual Conference, 2016 NBRE Spring Institute, 2016 ECB and Banco de Portugal workshop “Transmission and Effectiveness of Macroprudential Policies,” 2016 IFABS Barcelona Conference, and German Finance Association Annual Meeting, for useful comments and discussions. This article should not be reported as representing the views of Norges Bank. The views expressed are those of the authors and do not necessarily reflect those of Norges Bank.

References

Adrian, T., and Shin, H. S.. “Procyclical Leverage and Value-at-Risk.” Review of Financial Studies, 27 (2014), 373–403.CrossRefGoogle Scholar
Avdjiev, S.; Du, W.; Koch, C.; and Shin, H. S.. “The Dollar, Bank Leverage, and Deviations from Covered Interest Parity.” American Economic Review: Insights, 1 (2019), 193–208.Google Scholar
Avdjiev, S.; McCauley, R. N.; and Shin, H. S.. “Breaking Free of the Triple Coincidence in International Finance.” Working Paper, Bank for International Settlements (2015).Google Scholar
Baskaya, Y. S.; di Giovanni, J.; Kalemli-Ozcan, S.; and Ulu, M. F.. “International Spill-Overs and Local Credit Cycles.” NBER Working Paper No. 23149 (2017).Google Scholar
Bräuning, F., and Ivashina, V.. “Monetary Policy and Global Banking.” Journal of Finance, 75 (2020), 3055–3095.CrossRefGoogle Scholar
Brunnermaier, M. K.; De Gregorio, J.; Eichengreen, B.; El-Erian, M.; Fraga, A.; Ito, T., Lane, P. R.; Pisani-Ferry, J.; Prasad, E.; Rajan, R.; Ramos, M.; Rey, H.; Rodrik, D.; Rogoff, K.; Shin, H. S.; Velasco, A.; di Mauro, B. W.; and Yu, Y.. “Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses.” Committee on International Economic Policy and Reform (2012).Google Scholar
Bruno, V., and Shin, H. S.. “Cross-Border Banking and Global Liquidity.” Review of Economic Studies, 82 (2015a), 535–564.Google Scholar
Bruno, V., and Shin, H. S.. “Capital Flows and the Risk-Taking Channel of Monetary Policy.” Journal of Monetary Economics, 71 (2015b), 119–132.CrossRefGoogle Scholar
Bruno, V., and Shin, H. S.. “Dollar and Exports.” Working Paper, Bank for International Settlements (2020).CrossRefGoogle Scholar
Buch, C. M.; Bussiere, M.; Goldberg, L.; and Hills, R.. “The International Transmission of Monetary Policy.” Journal of International Money and Finance, 91 (2019), 29–48.Google Scholar
Cetorelli, N., and Goldberg, L. S.. “Banking Globalization and Monetary Transmission.” Journal of Finance, 67 (2012), 1811–1843.CrossRefGoogle Scholar
Christiano, L. J.; Eichenbaum, M.; and Evans, C. L.. “Monetary Policy Shocks: What Have We Learned and to What End?” In Handbook of Macroeconomics, Vol. 1A, Taylor, J. and Woodford, M., eds. Amsterdam: Elsevier (1999), Chapter 2.Google Scholar
Du, W., and Schreger, J.. “Local Currency Sovereign Risk.” Journal of Finance, 71 (2016), 1027–1070.CrossRefGoogle Scholar
Erik, B.; Lombardi, M. J.; Mihaljek, D.; and Shin, H. S.. “The Dollar, Bank Leverage, and Real Economic Activity: An Evolving Relationship.” AEA Papers and Proceedings, 110 (2020), 529–534.CrossRefGoogle Scholar
Forbes, K. J., and Warnock, F. E.. “Capital Flow Waves—or Ripples? Extreme Capital Flow Movements since the Crisis.” NBER Working Paper No. 26851 (2020).CrossRefGoogle Scholar
Gourinchas, P.-O., and Obstfeld, M.. “Stories of the Twentieth Century for the Twenty-first.” American Economic Journal: Macroeconomics, 4 (2012), 226–265.Google Scholar
Gourio, F.; Kashyap, A. K.; and Sim, J. W.. “The Trade Offs in Leaning against the Wind.” IMF Economic Review, 66 (2018), 70–115.CrossRefGoogle Scholar
Hofmann, B.; Shim, I.; and Shin, H. S.. “Sovereign Yields and the Risk-taking Channel of Currency Appreciation.” Working Paper, Bank for International Settlements (2016).Google Scholar
Jiménez, G.; Ongena, S.; Peydró, J.-L.; and Saurina, J.. “Hazardous Times for Monetary Policy: What Do Twenty-Three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk-Taking?” Econometrica, 82 (2014), 463–505.Google Scholar
Kashyap, A. K., and Stein, J. C.. “What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?” American Economic Review, 90 (2000), 407–428.Google Scholar
Miranda-Agrippino, S., and Rey, H.. “The Global Financial Cycle after Lehman.” AEA Papers and Proceedings, 110 (2020), 523–528.CrossRefGoogle Scholar
Molland, J. L. “Norwegian Banks’ Foreign Currency Funding of NOK Assets.” Staff Memo, Norges Bank (2014).Google Scholar
Morais, B.; Peydró, J.-L.; and Ruiz, C.. “The International Bank Lending Channel of Monetary Policy Rates and QE: Credit Supply, Reach-for-yield, and Real Effects.” Journal of Finance, 74 (2019), 55–90.CrossRefGoogle Scholar
Norges Bank. Norway’s Financial System 2018. Norges Bank (2018). Available at https://www.norges-bank.no/en/Published/Publications/norways-financial-system/2018/.Google Scholar
Rey, H. “Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence.” NBER Working Paper No. 21162 (2015).CrossRefGoogle Scholar
Schularick, M.; ter Steege, L.; and Ward, F.. “Leaning against the Wind and Crisis Risk.” Working Paper, CESifo (2020).Google Scholar
Wu, J. C., and Xia, F. D.. “Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound.” Journal of Money, Credit and Banking, 48 (2016), 253–291.CrossRefGoogle Scholar