Working Paper: CEPR ID: DP14128
Authors: Friederike Niepmann; Tim Schmidteisenlohr; Emily Liu
Abstract: This paper shows that monetary policy and prudential policies interact. U.S. banksissue more commercial and industrial loans to emerging market borrowers when U.S.monetary policy eases. The effect is less pronounced for banks that are more constrainedthrough the U.S. bank stress tests, reflected in a lower minimum capital ratioin the severely adverse scenario. This suggests that monetary policy spillovers dependon banks’ capital constraints. In particular, during a period of quantitative easingwhen liquidity is abundant, banks are more flexible, and the scope for adjusting lendingis larger when they have a bigger capital buffer. We conjecture that bank lendingto emerging markets during the zero-lower bound period would have been even higherhad the United States not introduced stress tests for their banks.
Keywords: US bank lending; stress tests; emerging markets; monetary policy spillovers
JEL Codes: E44; F31; G15; G21; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US monetary policy eases (E52) | US banks increase issuance of commercial and industrial loans to emerging market borrowers (F34) |
| Decrease in federal funds rate (E52) | Increase in loan issuance to emerging markets (F65) |
| Banks with lower minimum capital ratios in CCAR stress tests (G28) | Increase in lending to emerging market borrowers less than banks with better capitalized positions (F65) |
| Monetary policy changes (E52) | Significant increases in loan issuance observed up to three months after a policy change (G21) |
| Prudential regulation (CCAR results) (G28) | Responsiveness of bank lending to monetary policy changes (E52) |
| Increased lending to emerging markets (F65) | Greater risk-taking by US banks (F65) |