Cross-Border Bank Flows and Monetary Policy

Abstract

We analyze the impact of monetary policy on cross-border bank flows for a large sample of countries over two decades. We find evidence in favor of a cross-border risk-taking channel, as the monetary policy stance of source countries is an important determinant of cross-border bank flows. A relatively tighter monetary policy in source countries prompts banks to reallocate their lending toward safer foreign counterparties. The cross-border reallocation of credit is more pronounced for source countries with lower-capitalized banks. Also, the reallocation is directed toward foreign borrowers in relatively safer destinations, such as advanced economies or economies with investment-grade sovereign ratings.