What Drives Banks’ Responses to Global Monetary Shocks: Ownership or Balance Sheets?

When the U.S. Federal Reserve changes interest rates, which banks transmit those shocks more strongly to the rest of the world? Conventional wisdom suggests foreign-owned banks should be more sensitive because they belong to multinational banking groups. Our evidence, based on more than 2,000 banks across 116 countries, suggests a different conclusion: ownership alone is not a reliable predictor of how international monetary shocks affect bank lending.

Over the past few decades, the expansion of cross-border banking has reshaped how monetary policy is transmitted across countries. Changes in U.S. monetary policy now affect financial conditions well beyond domestic borders. A large body of work shows that globally active banks adjust their balance sheets in response to shifts in U.S. policy, transmitting these shocks to the economies in which they operate (Bruno and Shin, 2015; Cetorelli and Goldberg, 2011, 2012). This international bank lending channel has become a central piece of the broader “global financial cycle” view, where common factors, often tied to U.S. monetary conditions, drive credit dynamics across countries (Miranda-Agrippino and Rey, 2020).

The question has become particularly relevant in the aftermath of the sharp global monetary tightening cycle of 2022–2024, when policymakers sought to understand which institutions were most exposed to external financial conditions. As interest rates increased rapidly in advanced economies, concerns emerged about the extent to which global banks could amplify or dampen the transmission of these shocks across countries.

Even so, banks do not all react in the same way. One question that remains somewhat unsettled is what explains these differences. A natural candidate is ownership. Foreign subsidiaries are part of multinational banking groups and are therefore linked to parent institutions through internal capital markets. These links can matter for how shocks are transmitted. When parent banks face funding pressures or changes in financial conditions at home, they may reallocate resources across their network, affecting lending in foreign affiliates (Cetorelli and Goldberg, 2012). At the same time, access to group-level funding may also allow subsidiaries to smooth local shocks, making them less dependent on host-country conditions. It is not obvious, ex-ante, which of these forces dominates.

At the same time, there are reasons to think that ownership might not be the main driver. A growing strand of the literature points instead to banks’ balance sheet characteristics and funding structures. Banks that rely more heavily on cross-border or wholesale funding tend to be more exposed to global liquidity conditions, regardless of whether they are foreign-owned or domestic (Ongena et al., 2015; Baskaya et al., 2017). More recent work also highlights the role of geographic diversification and risk-taking behavior in shaping lending responses to external shocks. From this perspective, ownership may matter, but only as one element among several that determine how banks are connected to global financial markets.

One possible reason why ownership may not play a role is related to how foreign subsidiaries are funded in practice. Once banks establish operations abroad, particularly in the case of large institutions, they often rely heavily on local funding sources, such as deposits collected in the host country. This reduces their dependence on internal capital markets and limits the extent to which shocks originating in the parent bank’s home country are transmitted to their foreign affiliates. As a result, even though foreign ownership creates the potential for cross-border transmission, its actual importance may be attenuated when subsidiaries are largely funded locally.

In our recent paper, Is the International Bank Lending Channel Driven by Ownership? Evidence from Local Banks and Foreign Subsidiaries, we revisit the role of ownership in the international transmission of monetary policy. We ask whether foreign subsidiaries respond differently from domestic banks to U.S. monetary policy shocks, and whether these differences are economically meaningful. To address this question, we use a large bank-level dataset covering 2,039 institutions across 116 countries over the period 2001–2020. The analysis combines detailed balance sheet information with an exogenous measure of U.S. monetary policy shocks based on Bu, Rogers, and Wu (2021), which allows us to trace how unexpected changes in U.S. policy affect lending abroad.

The results suggest that, while ownership may play a role within specific multinational banking groups, its aggregate impact is not clear-cut. In the baseline estimates, foreign subsidiaries tend to respond somewhat more strongly to U.S. monetary policy shocks; however, these differences are not statistically significant. This conclusion remains unchanged when accounting for persistence in lending. Although the estimated magnitudes are not negligible and point to a potential amplification of external shocks through foreign-owned banks, substantial heterogeneity prevents us from identifying a robust effect.

Overall, the evidence suggests that ownership is not the primary determinant of international monetary transmission. Characteristics such as funding composition, reliance on wholesale funding, and integration into global financial markets appear to be more informative indicators of vulnerability.

This picture is perhaps not surprising. While multinational banks can reallocate funds across borders, they are also heterogeneous institutions, operating under different constraints and exposures. The findings suggest that ownership may capture part of this story in specific settings, but not all of it. Other factors, such as how banks are funded or how exposed they are to global markets, likely matter just as much. In that sense, the distinction between foreign and domestic banks may be less sharp than it first appears.

One possible explanation for this pattern is that foreign subsidiaries are not fully reliant on funding from their parent institutions. In many cases, especially for large banks, lending activity in host countries is largely financed through local deposits. This reduces dependence on internal capital markets and limits the transmission of shocks originating in the parent bank’s home country. As a result, the effect of ownership, while present, may be more limited than suggested by models that emphasize cross-border funding alone.

From a policy perspective, the results point in three directions: (i) Supervisors should not assume that foreign-owned banks are necessarily the main source of external financial spillovers; (ii) Macroprudential surveillance should focus on banks’ funding structures, especially reliance on cross-border and wholesale funding. (iii) Stress-testing frameworks should incorporate measures of global financial exposure rather than relying solely on ownership classifications.
For policymakers seeking to assess vulnerability to global monetary shocks, bank ownership is an incomplete guide. What matters most is how banks fund themselves and how closely they are connected to global financial markets.