Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/171790 
Year of Publication: 
2016
Series/Report no.: 
Working Papers No. 17-5
Publisher: 
Federal Reserve Bank of Boston, Boston, MA
Abstract: 
Global banks use their global balance sheets to respond to local monetary policy. However, sources and uses of funds are often denominated in different currencies. This leads to a foreign exchange (FX) exposure that banks need to hedge. If cross-currency flows are large, the hedging cost increases, diminishing the return on lending in foreign currency. We show that, in response to domestic monetary policy easing, global banks increase their foreign reserves in currency areas with the highest interest rate, while decreasing lending in these markets. We also find an increase in FX hedging activity and its rising cost, as manifested in violations of covered interest rate parity.
Subjects: 
global banks
monetary policy transmission
cross-border lending
JEL: 
E44
E52
F36
G15
G21
G28
Document Type: 
Working Paper

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