Divergent monetary policies and international dollar credit: Evidence from bank‐level data

• Author: Kelvin Ho,Andrew Tsang,Dong He,Eric Wong
• Date: 01 February 2018
• DOI: http://doi.org/10.1111/1468-0106.12255
• Published date: 01 February 2018

SPECIAL ISSUE ARTICLE

Divergent monetary policies and international dollar

credit: Evidence from bank-level data

Dong He

1

| Eric Wong

2

| Kelvin Ho

2

| Andrew Tsang

3

1

The International Monetary Fund, Washington

DC, USA

2

Research Department, Hong Kong Monetary

Authority, Hong Kong

3

Hong Kong Institute for Monetary Research,

Hong Kong

Correspondence

Eric Wong, Hong Kong Monetary Authority,

55th Floor, Two International Finance Centre,

8 Finance Street, Central, Hong Kong.

Email: etcwong@hkma.gov.hk

Abstract

This paper uses a comprehensive and detailed bank-level

data set to study how the divergence of central bank bal-

ance sheet policy in the US vis-à-vis the euro area and

Japan would affect the supply of international US dollar

loans by global banks. Our empirical findings support the

view that the contractionary effect of US monetary nor-

malization on global dollar liquidity would be offset by an

expansionary effect from continued supply of US dollar

loans by euro area and Japanese banks. The net effect,

however, is crucially dependent on the stability of global

foreign exchange markets and investor perceptions of the

default risks of global banks. Our findings show that there

could be a significant contraction of the supply of interna-

tional US dollar loans if and when the US monetary nor-

malization coincides with a dislocation of the FX swap

market and a rise of bank default risks. Our results are

robust to alternative model specifications and different

data sets.

1|INTRODUCTION

The US dollar is the premier currency for international trade and investment. According to statistics

from the Bank for International Settlements (BIS), around half of international claims by banks were

US-dollar denominated at the end of 2015 (Figure 1). The supply of international dollar credit is

largely influenced by the behaviour of non-US international banks, particularly those headquartered

in Europe and Japan (Ivashina, Scharfstein, & Stein, 2015; McCauley, McGuire, & Sushko, 2015),

as they intermediate the lion’s share of international dollar credit.

1

The strong presence of European and Japanese banks in the international dollar loan market

raises interesting questions about the role of their respective home central banks relative to that of

1

Throughout this paper, “international dollar credit”refers to US dollar-denominated credit by banks to nonbanks outside the United

States.

Received: 1 December 2016 Revised: 27 February 2017 Accepted: 1 April 2017

DOI: 10.1111/1468-0106.12255

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