Irem Erten
University of Warwick – Warwick Business School
In this paper, we document a link between interest-on-excess-reserves (IOER) and global banks’ internal capital markets. We find that foreign bank affiliates in the U.S. receive less funding from their parent banks when their home Central Bank increases the rate paid on excess reserves. We find a negative and statistically significant effect of IOER on the affiliate bank lending: a 100 basis points increase in the home Central Bank’s rate on excess reserves is linked to a 2.3 percentage points decline in the U.S. credit provided by foreign bank affiliates. We exploit different organizational forms and IOER eligibility for identification. We also control for demand-side factors in a loan-level data in which borrowers have multiple lending relationships. We find that within a banking organization, the credit supply response is stronger in the affiliates that are smaller, have ex ante less profitable loans, and rely on parent bank funding. Taken together, these results are consistent with a novel channel of unconventional monetary policy where IOER crowds out global credit supply. We argue that the type of monetary policy framework matters.