The Impact of Foreign Banks on Monetary Policy Transmission during the Global Financial Crisis of 2008-2009: Evidence from Korea

Abstract

session participants for very useful comments and suggestions, which were provided at the research seminar held at the Bank of Korea, July 2013. ContentsⅠ . Introduction ··············································································· 1 Ⅱ . The related literature ······························································ 2 Ⅲ . Model, data and estimation methodology ·························· 4 1. The model ································································································ 4 2. Data ··········································································································· 6 3. Econometric methodology ····································································· 8 Ⅳ . Estimation results ······································································ 8 1. The baseline estimations ······································································· 8 2. Foreign bank branches: US bank branches vs. non-US bank branches ···· 11 3. Global vs. regional foreign bank branches ····································· 13 4. Robustness tests ···················································································· 15 Ⅴ . Conclusion ················································································ 17 References ······················································································ 18 Appendix ························································································ 21This paper examines the impact of foreign banks on the monetary policy transmission mechanism in the Korean economy during the period from 2000 to 2012, with a specific focus on the lending behavior by banks with different types of ownership. Using the bank-level panel data of the banking system in Korea, we present consistent evidence on the buffering impact of foreign banks, especially foreign bank branches including American bank branches, on the effectiveness of the monetary policy transmission mechanism in Korea from the bank-lending channel perspective during the period of the global financial crisis of 2008-2009.Findings of this paper suggest that foreign bank branches reduced their lending when the Bank of Korea lowered its base rate substantially to conduct expansionary monetary policy during the global financial crisis period. One of the underlying reasons for this buffering effect by foreign bank branches is the existence of internal capital markets operated by multinational banks to overcome capital market frictions faced when the foreign banks finance their loans.

Monetary Policy Transmission in Emerging Asia: The Role of Banks and the Effects of Financial Globalization

“…27 This is in line with the literature that claims foreign banks to be a major channel of shock transmission. For example, using a sample of U.S. banks,Cetorelli and Goldberg (2012) find evidence that global banks usually manage liquidity on a global scale, actively using internal capital markets in reallocating funds in response to local shocks, thus contributing to international transmission of liquidity shocks and dampening the effect of domestic monetary policy Jeon et. al.…”

Monetary Policy Transmission in Emerging Asia: The Role of Banks and the Effects of Financial Globalization

“…In fact, in the following subsection, we find that foreign banks respond more strongly to global financial conditions, rather than monetary policy in host countries, compared to domestic banks.27 This is in line with the literature that claims foreign banks to be a major channel of shock transmission. For example, using a sample of U.S. banks,Cetorelli and Goldberg (2012) find evidence that global banks usually manage liquidity on a global scale, actively using internal capital markets in reallocating funds in response to local shocks, thus contributing to international transmission of liquidity shocks and dampening the effect of domestic monetary policy Jeon et. al.…”