Abstract
We provide new evidence on the effects of monetary policy on loans using bank-level data on 429 banks in CEE economies between 1998 and 2012. Only domestic banks adjust their loans to changes in monetary policy. This is driven by the supply side as deposits in foreign banks do not react to monetary policy, hence the bank lending channel is only active in domestic banks. Contrary to conventional wisdom, foreign banks do not have to rely on parent banks’ funding to insulate against monetary policy shocks. Indeed, we find parent bank and its country characteristics are irrelevant for subsidiary’s lending.
Highlights
Financial liberalization has led to an increased integration of financial markets over the last 30 years
We document a novel explanation for the difference in the transmission mechanism: the response of consumer deposits to monetary policy is absent in foreign banks while it is strong in private domestic banks
For the earlier period of 1990s, De Haas and van Lelyveld (2006) find that interest rate did not affect the pace of growth of credit. We find that this picture changed and the bank lending channel was active in domestic, but not in foreign banks in the Central and Eastern Europe (CEE) region
Summary
Financial liberalization has led to an increased integration of financial markets over the last 30 years. DENDERSKI & PACZOS: FOREIGN BANKS AND BANK LENDING CHANNEL stark result, that the response of credit to monetary policy is only weaker, in foreign than in the domestic banks. This finding is robust to a battery of checks, including accounting for banks heterogeneity other than ownership, differences in issuance of foreign currency loans, and the special role of the global financial crisis. We document a novel explanation for the difference in the transmission mechanism: the response of consumer deposits to monetary policy is absent in foreign banks while it is strong in private domestic banks. Ownership is an important stand-alone determinant of the structure of funding: foreign banks enjoy lower cost of financing and rely less on consumer deposits
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