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Le Pont de Londres: interactions between monetary and prudential policies in cross-border lending

Author

Listed:
  • Matthieu Bussière
  • Robert Hills
  • Simon Lloyd
  • Baptiste Meunier
  • Justine Pedrono
  • Dennis Reinhardt
  • Rhiannon Sowerbutts
Abstract
We examine how euro area (EA) monetary policy and recipient-country prudential policy interact to influence cross-border lending of French banks. We find that monetary spillovers via cross-border lending can be partially offset by prudential measures in receiving countries. We then explore heterogeneities, specifically by bank size and location of the affiliate (French HQ vs. affiliates based in the UK). We find that the response of lending from French HQ to EA monetary policy is less sensitive to recipient-country prudential policy for systemic banks (GSIBs) than for non-GSIBs’. In contrast, the response of lending from GSIBs’ affiliates in the UK is sensitive to recipient-country prudential policy. French GSIBs’ crossborder lending from French HQ responds differently than lending from international financial centres. We also find evidence that French GSIBs channel funds towards the UK in response to EA monetary policy, in a manner dampened by global prudential policy setting. These findings suggest the existence of a ‘London Bridge’: conditional on EA monetary policy, French GSIBs adjust their funds in the UK depending on global prudential policies and, from there, lend to third-party countries according to local prudential policies. Finally, we have similar findings for all EA-owned banks UK affiliates, suggesting a broader relevance for the London Bridge.

Suggested Citation

  • Matthieu Bussière & Robert Hills & Simon Lloyd & Baptiste Meunier & Justine Pedrono & Dennis Reinhardt & Rhiannon Sowerbutts, 2020. "Le Pont de Londres: interactions between monetary and prudential policies in cross-border lending," Working papers 753, Banque de France.
    • Handle: RePEc:bfr:banfra:753
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    References listed on IDEAS

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    Cited by:

    1. Meunier Baptiste & Pedrono Justine, 2021. "A Prudential trade-off? Leakages and Interactions with Monetary Policy," Working papers 805, Banque de France.
    2. Andreeva, Desislava & Coman, Andra & Everett, Mary & Froemel, Maren & Ho, Kelvin & Lloyd, Simon & Meunier, Baptiste & Pedrono, Justine & Reinhardt, Dennis & Wong, Andrew & Wong, Eric & Żochowski, Dawi, 2023. "Negative rates, monetary policy transmission and cross-border lending via international financial centres," Bank of England working papers 1010, Bank of England.
    3. Matthieu Bussière & Jin Cao & Jakob de Haan & Robert Hills & Simon Lloyd & Baptiste Meunier & Justine Pedrono & Dennis Reinhardt & Sonalika Sinha & Rhiannon Sowerbutts & Konstantin Styrin, 2021. "The interaction between macroprudential policy and monetary policy: Overview," Review of International Economics, Wiley Blackwell, vol. 29(1), pages 1-19, February.
    4. Coman, Andra, 2023. "Monetary policy spillovers and the role of prudential policies in the European Union," Working Paper Series 2854, European Central Bank.
    5. Bippus, B. & Lloyd, S. & Ostry, D., 2023. "Granular Banking Flows and Exchange-Rate Dynamics," Janeway Institute Working Papers 2314, Faculty of Economics, University of Cambridge.

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    More about this item

    Keywords

    : Monetary Policy; Prudential Policy; Policy Interactions; Spillovers; Financial Centre.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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