Monetary Policy and International Banking Dynamics
Summary
Monetary policy and international banking dynamics are deeply intertwined through the global transmission of central bank actions, cross-border funding flows and exchange-rate adjustments. Central banks employ interest-rate changes, asset-purchase programmes and liquidity facilities to steer domestic economic conditions. In an open financial system, these measures influence bank funding costs abroad, capital flows into emerging and advanced economies, and the propensity of banks to extend credit. Currency movements induced by monetary tightening or loosening can alter banks’ balance-sheet risk, encouraging shifts in lending volumes and maturities across jurisdictions. Moreover, the proliferation of foreign-currency debt and the divergence in macroprudential frameworks can amplify spillovers, underscoring the importance of coordination among regulators to contain systemic risk. Recent crises have illustrated how rapid policy responses—such as swap-line arrangements—can stabilise funding markets, while prolonged support may inadvertently fuel leverage and asset-price bubbles. Understanding these feedback loops is vital for designing policies that promote financial stability without undermining monetary objectives.
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Monetary Policy and International Banking Dynamics publication trend
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Technical terms
Monetary policy: Measures by a central bank to regulate the money supply and interest rates to achieve objectives such as price stability and full employment.
Central bank swap lines: Bilateral arrangements enabling one central bank to exchange its currency for foreign currency with another central bank, providing liquidity to domestic banks in need of that currency.
Covered interest parity: A no-arbitrage condition stating that the interest rate differential between two currencies equals the forward premium or discount, preventing risk-free arbitrage.
Foreign currency bond issuance: The process by which an entity issues debt instruments denominated in a currency other than its own domestic currency, exposing borrowers to exchange-rate risk.
Macroprudential regulation: Supervisory policies and tools designed to ensure the resilience of the financial system by addressing systemic risks and interconnectedness among institutions.
References
- Macro-Financial Stability in the COVID-19 Crisis: Some Reflections. Annual Review of Financial Economics (2023).
- Central Bank Swap Lines: Evidence on the Effects of the Lender of Last Resort. The Review of Economic Studies (2021).
- Financial Globalization and Bank Lending: The Limits of Domestic Monetary Policy. Journal of Financial and Quantitative Analysis (2022).
- The rise in foreign currency bonds: The role of US monetary policy and capital controls. Journal of International Economics (2023).
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