The Transmission of Foreign Monetary Policy Shocks into the United States through Foreign Banks

Abstract

This paper examines the transmission of foreign monetary policy shocks into the United States through the activities of foreign banks in the US. Using a rarely studied bank-level dataset of foreign banks’ activities in the US over the 1997-2014 period, the paper examines how changes in monetary policy in banks’ home countries affect internal capital flows between the US affiliate and its head office abroad. Furthermore, the paper explores the extent to which these foreign monetary policy-induced internal capital flows affect the lending of foreign banks in the US. Results show that monetary tightening in banks’ home countries causes them to withdraw funding from their US-based affiliates both in the pre- and post-crisis periods, but these funding withdrawals’ effects on lending are only detectable in the pre-crisis period. The transmission of foreign monetary policy is stronger into the lending of US-based foreign branches and agencies than into the lending of FDIC-insured foreign banks which are chartered as national and state banks.