Is US Bank Lending Sensitive to Exchange Rates? A Panel Data Investigation

Michael R. Jonas

Department of Economics, University of San Francisco, San Francisco, CA, USA.

DOI: 10.4236/me.2014.58078                

Abstract

The goal of this paper is to examine the sensitivity of US bank lending to movements in the exchange rate. Using a panel of quarterly bank-level balance sheet observations, I show that there exists significant and meaningful exchange rate sensitivity of cross-border lending activity and total domestic loans. This relationship operates through traditional net export channels, as well as mechanisms specific to banks engaged in international lending. Further, I show that exchange rate innovations represent a source of long run lending volatility equivalent to monetary policy shocks for small banks. Lastly, exchange rate movements are shown to be associated with a four-fold increase in growth of non-performing loans for small banks, providing direct evidence of transfer risk for cross-border banks.

Keywords

Cross-Border Banking, Exchange Rates, Monetary Policy, Bank Lending Channel

Conflicts of Interest

The authors declare no conflicts of interest.

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