Spillover Effects of US Monetary Policy on Banking Development: Evidence from the Asian Region

Abstract

This study investigates the dynamic impacts of local interest rate volatility and the spillover effects of the US policy rate on the banking development of Asian countries from 1980 to 2015. Bounds testing within the autoregressive distributed lag (ARDL) framework is employed to explore the long-term and short-term impacts. In addition, the study adopts a principal components analysis to create a comprehensive index for banking development to capture the major dimensions of the banking development concept. The empirical findings indicate that local interest rate volatility has negative impacts on the banking industry of Asian countries. Moreover, the existence of the negative spillover impact of the US policy rate on the banking development proxy is revealed in the sampled countries. These impacts continue to play a significant role in dampening the path of banking sector development. Therefore, the banking industry of Asian countries seems to be vulnerable to interest rate risk. The results could provide important implications for policymakers to improve the banking systems of Asian economies. Bankers must consider the impacts of local interest rate policies, as well as the role of US interest rates.