Negative Rates, Monetary Policy Transmission and Cross-Border Lending via International Financial Centres

This working paper is written by Desislava Andreeva (European Central Bank), Andra Coman (European Central Bank), Mary Everett (Central Bank of Ireland), Maren Froemel (Bank of England), Kelvin Ho (Hong Kong Monetary Authority), Simon Lloyd (Bank of England), Baptiste Meunier (European Central Bank) (Banque de France), Justine Pedrono (Banque de France), Dennis Reinhardt (Bank of England), Andrew Wong (Hong Kong Monetary Authority), Eric Wong (Hong Kong Monetary Authority) and Dawid Żochowski (European Central Bank).We study the effects of negative interest rate policies (NIRP) on the transmission of monetary policy through cross-border lending. Using bank-level data from international financial centres – the United Kingdom, Hong Kong and Ireland – we examine how NIRP in the economies where banks have their headquarters influences cross-border lending from financial-centre affiliates. We find that NIRP impairs the bank-lending channel for cross-border lending to nonbank sectors, especially for those banks that have only a weak deposit base in IFCs – and are thus relatively more exposed to NIRP in their headquarters. Using euro-area data, including bank-level data from France, we find that NIRP does not influence overall cross-border lending from banks’ headquarters’ economies, but NIRP does impair lending to financial sectors based in IFCs. This impairment is stronger for banks with a large deposit base in headquarter economies exposed to NIRP