Do the U.S. Monetary Policy Shocks Affect Bank Lending in Latin America?

In our deeply interconnected global financial landscape, the decisions made by central banks wield significant influence that extends far beyond the confines of national borders. Specifically, monetary policy exerts considerable influence over both local and global financial markets, affecting critical factors like interest rates and credit availability. These financial dynamics, in turn, ripple through the broader real economy.

The extensive literature on the bank lending channel and the risk-taking channel of monetary policy has consistently demonstrated banks’ pivotal role and financial characteristics in transmitting the monetary policies of local central banks. However, less attention has been directed towards investigating the existence of an international bank lending channel. This shift in focus has mainly been a response to the rise of global banks. Recent empirical studies have unveiled that globally active U.S. banks serve as active conduits for transmitting monetary policy shocks to other nations. Their strategic responses to these shocks have discernible implications, notably in the distribution of bank claims between the United States and foreign countries. 

Limited attention has been devoted to examining how U.S. monetary policy shocks are transmitted to countries where the presence of global U.S. banks is minimal or non-existent. There are compelling reasons to suspect that U.S. monetary policy shocks also exert an influence on bank lending in these cases, particularly when considering small, open, emerging market economies like those In Latin America. To begin, this is because central banks in these countries often react to shifts in U.S. policy interest rates (Huertas, 2022). Consequently, U.S. monetary policy shocks can influence local bank lending channels. Furthermore, alterations in U.S. interest rates impact worldwide capital flows, subsequently influencing exchange rates and asset prices, such as housing prices. These, in turn, have implications for the propensity to engage in borrowing and lending within credit markets.

In our forthcoming paper, we investigate the propagation of U.S. monetary policy shocks to bank lending within five of the largest Latin American nations (Brazil, Chile, Colombia, Mexico, and Peru). Notably, the presence of large international banks, particularly those from the United States, is limited in these five countries. That is, their financial systems are primarily comprised of domestic banks. We utilize annual balance sheet data encompassing all banks operating in these five countries, spanning from 2000 to 2021. We utilize the recently developed measure of U.S. monetary policy shocks introduced by Bu et al. (2021).

Table 1 presents descriptive statistics of the bank-specific variables utilized in this study. It is evident that the average annual growth rate of gross loans in the five countries is notably robust, consistently exceeding 10% across the board. Furthermore, substantial disparities are observable, with Mexican banks exhibiting a gross loan growth rate more than double that of their Colombian counterparts. The control variables display significant heterogeneity as well. On average, Chilean banks appear larger but less solvent compared to their counterparts in other countries. Conversely, Colombian banks exhibit notably lower liquidity levels compared to their peers in the dataset.