Abstract

We provide new evidence on bank ownership and transmission of monetary policy using bank‐level data on 453 banks in Central and Eastern European economies between 1998 and 2012. Only domestic banks adjust loans to changes in monetary policy, while foreign banks do not. Conventional wisdom says that this is because foreign banks can rely on parent banks' funding to insulate against monetary policy shocks. In this paper we document an alternative explanation. Deposits in foreign banks do not react to monetary policy, hence the bank lending channel is only triggered in domestic banks. (JEL E50, F36, G21)

Highlights

  • Financial liberalization has led to an increased integration of financial markets over the last 30 years

  • We find that foreign banks do not depend on neither capitalization, nor profitability nor liquidity of their parent bank

  • We have investigated empirically the role of foreign banks in the bank lending channel of monetary policy

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Summary

Introduction

Financial liberalization has led to an increased integration of financial markets over the last 30 years. The emerging and developing countries, entered this process with under-capitalized and weak banks. Large shares of the financial sector in these countries are controlled by subsidiaries of foreign banks. The financial integration was accompanied by a development of asymmetric cross-border owner-subsidiary relationships. It has been a long-standing concern for policy makers that increased foreign penetration may weaken the bank lending channel of monetary policy and put the economy at risk of financial crisis contagion. In this paper we investigate the working of the bank lending channel and the role of foreign-owned banks

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