1. The international transmission of monetary policy through financial centres: evidence from the United Kingdom and Hong Kong
Robert Hills, Kelvin Ho, Dennis Reinhardt,
Rhiannon Sowerbutts, Eric Wong, and Gabriel Wu
30 June 2017
Global Financial Linkages and Monetary Policy Transmission
JIMF-IBRN-BuBa-BdF-PSE Conference
Any views expressed are solely those of the authors and so should not be taken to represent those of the Bank of England or the Hong Kong Monetary Authority.

2. Main Questions
How does monetary policy in systemic countries (US, EA, Japan) affect bank lending in the UK and HK?
Does the transmission depend on financial linkages or balance sheet structure of banks?
Does it matter which currency the lending is denominated in?
Policy relevance: Aggregate data used in previous studies may mask offsetting individual bank effects  Host-country supervisors may need to take into account heterogeneities in banks’ financial linkages and balance sheet structures
[D: Allude here to policy relevance as slide now hidden]

3. Transmission channels
A tightening of monetary policy abroad can, in principle, impact on lending to real or financial sectors in both the UK and HK, positively or negatively, depending on the relative strength of:
Bank funding channel (Bernanke and Blinder, 1992, Disyatat, 2010)
Banks face more constraints in funding after a tightening in MP  reduce real and financial sector lending at home and abroad
Portfolio channel (Bernanke and Gertler, 1995)
When MP tightens, borrowers at home become less creditworthy and () banks increase real sector lending to other countries to keep their overall portfolio of risk unchanged.
Highlight that for bank funding channel we look into real sector and interbank lending.

4. Why a joint HK/UK paper? Focus on financial centres
Both HK and UK are important financial centres:
Global funding/lending hubs with diverse financial linkages
Wide variety of foreign banks, different organisational forms
FX-denominated lending (variety of currencies)
High importance of both real and financial sector lending
Differences between HK and UK banking systems in how strongly different bank types (domestic-owned, foreign subs or branches) are financially linked influences our priors and focus of analysis
UK: focus on all banks
HK: focus on foreign branches
[I]: Compared to the other papers presented today: how is our main focus different from others.

5. Characteristics of the UK and HK banking sectors
As international financial centres, large presence of foreign banks (they account for nearly half of total banking system assets in both the UK and HK)
The UK banking sector has a more even mix of foreign bank branches and subsidiaries
While, HK banking sector is more dominated by foreign bank branches
As IFCs, both UK and HK banking sectors have large presence of foreign banks and they account for nearly half of total banking system assets.
However, in terms of distribution of foreign banks, the UK banking sector has a more even mix of foreign bank branches and subsidiaries. While the HK sector is dominated by foreign bank branches.

6. Characteristics of the UK banking sector
In terms of financial linkages, all UK banks (domestic-owned banks, foreign subsidiaries and branches) have sizable lending/funding with rest of world, especially with systemic countries
In terms of financial linkages, all UK domestic-owned banks, foreign subsidiaries and branches have sizable lending and funding with rest of world, especially with systemic countries.
Almost 25% of banks’ assets are in the euro area, with Japan and the USA accounting together for another 10%.
Net funding linkages vary strongly depending on the bank. On average, UK banks are net dependent on financing from abroad

7. Characteristics of the HK banking sector
While in HK, foreign bank branches are highly integrated with their parent banks. Other types of banks are less integrated with foreign countries in terms of funding
While in HK, foreign bank branches are highly integrated with their parent banks. Other types of banks are less integrated with foreign countries in terms of funding. In particular, intragroup funding constitutes a significant funding source for FBHKs, while foreign subsidiaries rely mainly local retail deposits.
Notes:
Position as of end-2015
Systemic countries refer to the US, Euro Area, Japan and the UK
Source: HKMA

8. Banking system characteristics and implications for empirical analysis
The structural differences between the two banking sectors allows us to explore two different forms of transmission channels:
For the UK, given all types of UK banks have sizeable financial linkages with systemic countries, we focus on all bank types to:
Directly estimate the relevance of financial linkages for the transmission of MP from systemic countries to UK bank lending
For HK, given the dominance of foreign branches (FBHKs) and differences in the liability structure between them and other types of banks, we focus on branches from systemic countries to:
Estimate how changes in MP in system foreign branches’ home countries impacts bank lending in Hong Kong…
…. while going a step further and explore how the balance sheet characteristics of parent banks influence the transmission of MP from home countries to their branches in Hong Kong

9. Changes in monetary policy in respective economy
Changes in monetary policy for global banks’ home country
Foreign economy
Japan
economy
Euro Area
economy US
economy
Japan
Global
banks
Euro Area
Global
banks US
Global
banks UK
Global
banks
Cross border liabilities
Cross border claims
Global bank’s business model and funding to its
foreign branches
Domestic economy
Banks in UK
(domestic-owned, foreign bank subsidiaries and branches)
Domestic branches of
foreign global banks
Lending
Lending
UK economy HK
economy
HK: Inward transmission through domestic branches of foreign global banks
UK: Inward transmission through UK banks’ financial linkage with systemic countries

10. Priors Bank funding channel Portfolio channel
UK: high dependence on cross-border wholesale funding implies that the bank funding channel might be sizable but UK banks receive funding from multiple sources, so might be easier to replace
HK: Parent bank funding in general is one significant funding source of FBHKs
Portfolio channel
UK: banks exposed strongly to systemic countries so portfolio channel might be sizable
HK: Parent banks that have sizable lending activities might substitute loan portfolio towards foreign credit via FBHKs when home MP tightens
 We employ information on financial linkages and balance sheet of parent banks to assess the relative strength of these channels

11. Results preview: ‘funding’ and ‘portfolio’ channels
For ‘bank funding’ channel
UK banks which are more dependent on Japan for net funding show a more negative change in their financial lending following a tightening of MP in Japan
But stronger evidence for FX bank funding channel: Japanese MP transmits via USD and Euro lending in UK. And US MP via USD lending in UK.
Foreign branches in HK whose parent is less reliant on wholesale funding have higher loan growth to the real sector when MP is tightened in the parent country
HK: No significant difference in the transmission of MP via HKD or USD lending, perhaps reflecting the stable linked exchange rate system

12. Results preview: ‘funding’ and ‘portfolio’ channels
For ‘portfolio’ channel
UK banks with a higher share of their claims on the EA or US experience a more positive change in their bank lending growth to UK real sectors when MP is tightened in EA or US
Results driven by sterling-denominated lending
FBHKs whose parent bank has more lending business increase their lending in HK by more when MP is tightened in the parent country
HK: No significant difference in the transmission of MP via HKD or USD lending

13. Data Bank level data and balance sheet characteristics
Quarterly data spanning from 2000Q1 to 2015 Q4
UK: Bank balance sheet using raw data from the Bank of England’s regulatory reporting forms
HK: Branch-level variable for FBHKs using regulatory data from the HKMA, while parent-level variables are constructed using consolidated data of the ultimate parent from SNL and S&P Capital IQ
Monetary policy measures
QE data and short-term policy rates are from national sources
Two-factor shadow policy rate as described in Krippner (2015)
Estimated level of the shadow rate is sensitive to the assumption underlying the specification, but changes in shadow rates more consistent across specifications
UK: You can skip this
HK: For HK, branch level variables are constructed using regulatory data from the HKMA reporting forms. Parent level variables are constructed using consolidated data of the ultimate parent from SNL and S&P capital IQ.
More on stats not mentioned before:
Thanks for the call. We have calculated some statistics to show that foreign branches in HK are also significant players in HK loan market. As of end 2015, domestic lending by foreign branches account for around 30% of all domestic loans in Hong Kong  (for comparison: around 23% at end-2005).

14. Appropriate financial linkages to test bank funding and portfolio channels – HK and UK
For bank funding channel: The extent of transmission tends to be higher if the bank has a higher reliance on wholesale funding from the country tightening monetary policy
For UK, we use the respective banks’ net funding from the country which tightens MP (% of total liabilities)
For HK, we use the parent bank’s core deposit ratio (Other measures include parent bank’s liquid asset ratio, and FBHKs’ Net due to (overseas offices).
For portfolio channel: The transmission is stronger the more lending the bank does to/in the country tightening monetary policy
For UK we use gross lending to ctry’s non-bank sector (% of total assets).
For HK we use the parent bank’s loan-to-asset ratio (Other measures include parent bank’s share of securities to assets, tier-1 ratio and impaired loan ratio)
[I] Both the choice of the respective funding linkage variable and the appropriate choice of the monetary policy measure depends on whether the bank funding or the portfolio channel is investigated.
HK: Following Disyatat (2010), an tightening of monetary policy is associated with higher external finance premium, we therefore posit that the extent of the transmission tends to be smaller if the parent bank has a lower reliance on wholesale funding (as reflected by higher core deposit ratio). Other measures that are relevant for bank funding channel include parent bank’s liquid asset ratio and FBHKs’ net due to from overseas offices.
For portfolio channel, we hypothesise that parent banks will rebalance their lending portfolio in the face of home country monetary policy tightening, and the extent will be greater if they have a large loan portfolio. Therefore, our baseline measure is parent banks’ loan-to-asset ratio. Similarly, other measures that are also relevant for testing include parent’s share of securities assets, tier-1 ratio and impaired loan ratio. [The latter two measures the balance sheet strength of the banks which assume the portfolio channels would be weaker for weak banks. The former is chosen as we assume that banks will substitute from securities assets towards loans to offset the decline in asset value. ]

15. Appropriate MP measures to test bank funding and portfolio channels
As banks rely on short term funding, monetary policy actions that affect the long end of the yield curve may not be as relevant
It is likely that unconventional monetary policy does not affect bank lending through the traditional bank funding channel, as banks are flushed with reserves, but through the portfolio channel
For testing bank funding channel: the actual short-term policy (bounded by zero)
For testing the portfolio channel: shadow rate or measures of quantitative easing.

16. Empirical Methodology
We follow Buch et al (2017) in designing the empirical model
Two main specifications which differ depending on the MP measures employed
The first specification adopts short-term policy rate and QE as MP measures
It is used to explore both bank funding and portfolio channels
The second specification adopts two-factor shadow rate as MP measure
It is appropriate only for studying the portfolio channel
This is because the cost at which banks fund themselves cannot be negative, and the shadow rate can be negative.
Due to the differences in the sources of MP changes as explained in previous slides, the two specifications for the analysis of HK would differ slightly to that of the UK
We use Quarterly data from 2000Q1 to 2015 Q4 and follow the methodology in Buch et al. But the specification changes slightly between HK and UK. Whih I’ll explain on the next slides

17. Empirical Specification: UK
∆𝑌 𝑏,𝑡 = 𝛼 0 + 𝑐𝑡𝑟𝑦 𝑘=0 𝐾 𝛼 1,𝑘 𝑐𝑡𝑟𝑦 ∙ ∆𝑀𝑃 𝑡−𝑘 𝑐𝑡𝑟𝑦 ∙ 𝐶ℎ𝑎𝑛𝑛𝑒𝑙 𝑏,𝑡−𝐾−1 𝑐𝑡𝑟𝑦 + 𝛼 2,𝑘 𝑐𝑡𝑟𝑦 ∙ ∆𝑄𝐸 𝑡−𝑘 𝑐𝑡𝑟𝑦 ∙ 𝐶ℎ𝑎𝑛𝑛𝑒𝑙 𝑏,𝑡−𝐾−1 𝑐𝑡𝑟𝑦 + 𝛼 3 𝑐𝑡𝑟𝑦 𝐶ℎ𝑎𝑛𝑛𝑒𝑙 𝑏,𝑡−𝐾−1 𝑐𝑡𝑟𝑦 𝑐𝑡𝑟𝑦 𝑘=0 𝐾 𝛼 1,𝑘 𝑐𝑡𝑟𝑦 ∙ ∆𝑀𝑃 𝑡−𝑘 𝑐𝑡𝑟𝑦 ∙ 𝐶ℎ𝑎𝑛𝑛𝑒𝑙 𝑏,𝑡−𝐾−1 𝑐𝑡𝑟𝑦 + 𝛼 2,𝑘 𝑐𝑡𝑟𝑦 ∙ ∆𝑄𝐸 𝑡−𝑘 𝑐𝑡𝑟𝑦 ∙ 𝐶ℎ𝑎𝑛𝑛𝑒𝑙 𝑏,𝑡−𝐾−1 𝑐𝑡𝑟𝑦 + 𝛼 3 𝑐𝑡𝑟𝑦 𝐶ℎ𝑎𝑛𝑛𝑒𝑙 𝑏,𝑡−𝐾−1 𝑐𝑡𝑟𝑦 + 𝛼 4 𝑋 𝑏,𝑡−1 + 𝑓 𝑏 + 𝑓 𝑡 + 𝜖 𝑏,𝑡
∆𝑌 𝑏,𝑡 is the log change of lending to the private non-bank sector (households and PNFC) or the financial sector (interbank loans) by bank b at time t
MP Spec 1 (for testing bank funding and PF): actual short term policy rates (MP) and QE: contemporaneous and three lags of changes to test transmission over a 1-year period.
MP Spec 2 (for testing PF): changes in shadow rates only
𝐶ℎ𝑎𝑛𝑛𝑒𝑙 𝑏,𝑡−𝐾−1 𝑐𝑡𝑟𝑦 financial linkages: either net funding from ctry (ratio to total assets) or gross lending to ctry’s non-bank sector.
𝑋 𝑏,𝑡−1 is a vector of time-varying bank control variables. 𝑓 𝑡 ,𝑓 𝑏 are time and bank fixed effects.
Slide: Appropriate MP measure to test for bank funding and PF channels:
As banks rely on short term funding, monetary policy actions that affect the long end of the yield curve may not be as relevant
It is likely that unconventional monetary policy does not affect bank lending through the traditional bank funding channel, as banks are flushed with reserves, but through the portfolio channel
For testing bank funding channel: the actual short-term policy (bounded by zero)
For testing the portfolio channel: shadow rate or measures of quantitative easing.

18. Empirical Specification: HK
∆ 𝑌 𝑏,𝑗,𝑡 = 𝛼 0 + 𝑘=0 𝐾 ( 𝛼 1,𝑘 ∆ 𝑀𝑃 𝑡−𝑘 ℎ𝑜𝑚𝑒 . 𝐶ℎ𝑎𝑛𝑛𝑒𝑙 𝑏,𝑡−𝐾−1 + 𝛼 2,𝑘 ∆ 𝑄𝐸 𝑡−𝑘 ℎ𝑜𝑚𝑒 . 𝐶ℎ𝑎𝑛𝑛𝑒𝑙 𝑏,𝑡−𝐾−1 ) + 𝛼 3 𝐶ℎ𝑎𝑛𝑛𝑒𝑙 𝑏,𝑡−𝐾−1 + 𝛼 4 𝑋 𝑏,𝑗,𝑡−1 + 𝑓 𝑗,𝑡 + 𝑓 𝑏 + 𝜖 𝑏,𝑡
Compared to specification of the UK, ∆𝑀𝑃 𝑡−𝑘 𝑐𝑡𝑟𝑦 and ∆𝑄𝐸 𝑡−𝑘 𝑐𝑡𝑟𝑦 have been replaced by ∆ 𝑀𝑃 𝑡−𝑘 ℎ𝑜𝑚𝑒 and ∆ 𝑄𝐸 𝑡−𝑘 ℎ𝑜𝑚𝑒 (i.e. MP measures in the branches home country) respectively
Balance sheet characteristics of parent banks have replaced the bilateral financial linkages as 𝐶ℎ𝑎𝑛𝑛𝑒𝑙 𝑏,𝑡−𝐾−1
Home country-time fixed effects 𝑓 𝑗,𝑡 has been adopted instead of pure time fixed effects 𝑓 𝑡 in order to capture changes in loan demand conditions and other macro conditions that are common across parent banks in the home country
[I]: Due to the differences in the sources of MP changes as explained in previous slides, the two specifications for the analysis of HK would differ slightly to that of the UK
As mentioned, the source of monetary policy shock is from the home country of FBHKs, ∆𝑀𝑃 𝑡−𝑘 𝑐𝑡𝑟𝑦 and ∆𝑄𝐸 𝑡−𝑘 𝑐𝑡𝑟𝑦 have been replaced by ∆ 𝑀𝑃 𝑡−𝑘 ℎ𝑜𝑚𝑒 and ∆ 𝑄𝐸 𝑡−𝑘 ℎ𝑜𝑚𝑒 respectively.
Balance sheet characteristics of parent banks have replaced the bilateral financial linkages as 𝐶ℎ𝑎𝑛𝑛𝑒𝑙 𝑏,𝑡−𝐾−1 .
Home country-time fixed effects 𝑓 𝑗,𝑡 has been adopted instead of pure time fixed effects 𝑓 𝑡 in order to capture changes in loan demand conditions and other macro conditions that are common across parent banks in the home country

19. Main Questions
How does monetary policy in systemic countries (US, EA, Japan) affect bank lending in the UK and HK?
Does the transmission depend on financial linkages or balance sheet structure of banks?
Does it matter which currency the lending is denominated in?

20. The bank funding channel: UK

21. The bank funding channel: UK
Banks more exposed to the EA displayed on average smaller lending growth in the UK (similar for Japan MP and UK real sector lending).

22. The bank funding channel: UK
Aside: real vs financial lending. There is weak evidence for the bank lending channel for real sector lending. Why might that be? One candidate explanation is that, rather than decrease their lending to the real economy, banks prefer to cut their interbank lending – perhaps because they have invested less in developing a LT relationship with other banks. This table explores that hypothesis by looking at how banks respond in terms of their interbank lending.
[sum of coefficients = test of whether coefficients are jointly significant – i.e. what happens if everyone increases rates by 100bp, giving equal weight to each region. All 3 are correlated so each individually might have more explanatory power than deserved…]
Banks more dependent on net interbank funding from Japan show a more negative change in their interbank lending in the UK than other banks, once Japan increases its short rates
Why stronger evidence than for US/EA? Banks exposed to Japan are often Japanese affiliates with strong funding linkages to their home country: lost funding harder to substitute + need to take into account currency denomination.

23. The bank funding channel: UK
Net funding linkages do not appear to change the transmission of changes in QE – i.e. limited bank funding channel as hypothesised for UMPs.

24. Bank funding channel on real sector lending: HK
Evidence of bank funding channel for lending to the real economy: FBHKs whose parent relies less on wholesale funding tends to attain higher loan growth than other banks after MP tightening at home
… for changes in both conventional (short rates) and unconventional monetary policy (QE)
For HK, we find evidence of bank funding channel on lending to the real sectors: FBHKs whose parent rely less on wholesale funding tends to attain higher loan growth than other banks.
In particular, for 1% increase in the short rate for home country (MP tightens), a FBHK whose parent’s deposit-to-asset ratio is 10% higher than another bank (i.e. less reliance on wholesale funding) would lead to higher loan growth of 5.7% (1*10*0.574) for this FBHK
In addition, we also find parent bank’s reliance on wholesale funding also play a role in determining the extent of inward transmission of UMP. The results seems to be in line with Temsevary et. al (2015). [US banks with lower deposit to asset ratios increase their cross-border flows by more than others in response to an expansion of Fed’s purchases of Treasury securities.]

25. Bank funding channel on interbank lending: HK
In contrast to the UK results, no strong evidence of conventional monetary policy spillovers via FBHKs’ interbank lending
However, there is tentative evidence to suggest that the bank funding channel may be at work during periods of unconventional monetary policy:
when the home country expands QE, for a more liquidity-constrained parent bank (i.e. lower liquid asset ratios), its FBHK tends tend to increase interbank lending by a greater extent relative to its counterparts
However, we do not find strong evidence of conventional monetary policy transmission for FBHKs’ interbank lending. But there is some evidence to suggest that the bank funding channel may be at work during UMPs. For instance, a more liquidity constrained parent banks would tend to increase its FBHK interbank lending by more in response to expansionary QE in Home country. [This may be because the liquidity-constrained banks would benefit more from the loosening of liquidity conditions relative to others. ]

26. The portfolio channel: UK

27. The portfolio channel: UK
Focusing first on CMPs:
Banks with a higher share of their claims in the US/EA experience a more positive change in their bank lending growth to UK real sectors following a tightening in short rates.
Lack of significance for Japan likely due to small exposures of UK banks to Japanese non-banks and a lack of variation in Japanese CMPs
{Speak about size of effects}.
Old notes: This chart shows the results for lending to the UK real economy. So for example the top LHS observation shows how differently UK-resident banks react when the Fed tightens monetary policy when they have a higher share of their cross-border claims on the US. It suggests in fact that such banks have a more positive change in their lending to the UK real economy than other banks [larger increase/smaller decline]. In other words, it’s consistent with a portfolio channel in effect: banks react to the increased default probability in the US by shifting some of their lending away from the US to the UK. The same is true for banks with Japanese exposures and JP monetary policy, and directionally it’s the same for the €A, though it’s not significant.
[how to interpret coefficient? If +0.10, and a bank has 50% of assets more in the US than another bank, then 1pp (100bp) increase in US interest rates leads to faster lending growth by 5pp (0.1*50%)] for this bank.]

28. The portfolio channel: UK
Mixed results for UMPs:
Evidence for changes in shadow rates give evidence consistent with the PF channel
QE has negative coefficients (i.e. banks more exposed show a more positive change for tightening) for US, EA and Japan but only significant for the latter.

29. Portfolio channel on real sector lending: HK
The FBHK of a parent bank with a higher loan-to-asset ratio displays higher loan growth to the real sector in HK when the home country tightens MP(consistent with PF channel)
Although no strong evidence for QE, the above results remain consistent when changes in shadow rate are used
Similar effect is also found on parent banks with a larger holding of securities
For portfolio channel, there is evidence for the existence of such channel in the analysis of HK. A parent bank with a higher loan-to-asset ratio is associated with higher domestic loan growth by their FBHKs when home country MP tightens.
Similar effect is also found on parent banks with a larger holding of securities, which is in line with our conjecture that banks holding more securities would be subject to larger mark-to-market losses when monetary policy tightened, contributing to a bigger portfolio shift from securities to loans.
While there is no strong evidence for QE, the results remain consistent with portfolio channels when changes in shadow rate are used.

30. Main Questions
How does monetary policy in systemic countries (US, EA, Japan) affect bank lending in the UK and HK?
Does the transmission depend on financial linkages or balance sheet structure of banks?
Does it matter which currency the lending is denominated in?

31. Data and stylised facts: currency denomination
£bn, as of 2015Q4
Real sector lending mostly denominated in sterling, though significant usage of euros and USD for some banks
Interbank lending: For average bank: ca. 1/3 of interbank loans denominated in non-sterling currencies and much more for larger banks.

32. Currency denomination of lending: funding channel
Results for the bank funding channel are driven by foreign- currency denominated lending: a tightening in US monetary policy leads to a larger negative change in $-denominated financial lending by banks dependent on the US for net funding.
Lack of significance for EA MP and € lending could be explained by the currency denomination of financial linkages: while, on average, most funding from the US is in $, only around half of funding from the EA is denominated in €.

33. Currency denomination of lending: PF channel
Brauning and Ivashina (2017): following MP tightening cross-border/cross-currency liquidity flows back home implying lower swapping activity and marginal costs of funding foreign lending.
 leads, similar to the portfolio effect, to an increase in lending abroad
 this increase should, however, occur in the currency of the foreign market (sterling in our case) as lending in the currency of the home country is not subject to the lower marginal costs FX swaps.
Results for the portfolio channel are driven by sterling-denominated lending (consistent with Brauning and Ivashina, 2017)

34. Currency dimension for bank funding channel: HK
Similar to UK, we find evidence of bank funding channel on FBHKs’ USD lending to real sector when their home-country monetary policy tightens
But we also find significant spillover effect on FBHKs’ HKD real sector lending through this channel
In Hong Kong, we repeat our estimation exercise on domestic lending denominated in USD and HKD respectively, the two largest currencies. [Data on other currency disaggregation in lending are not available].
The results are largely consistent with that of the UK. We find evidence of bank funding channel on FBHKs’ USD lending to real sector.
However, we also find significant spillover effect on FBHKs’ HKD lending through this channel.

35. Currency dimension for portfolio channel: HK
Evidence of portfolio channel in both USD and HKD real sector lending of FBHKs
 No significant difference in the transmission of MP via HKD or USD lending for both bank funding and portfolio channels. May reflect the long- standing stable linked exchange rate system
Turning to portfolio channel, the HK results show evidence of portfolio channel in both USD and HKD real sector lending of FBHKs. The results on currency dimension for both bank funding and portfolio channels may reflect the longstanding Linked Exchange Rate System.

36. Conclusion
Evidence of both ‘bank funding’ and ‘portfolio’ channels in both UK and HK banking sectors
The currency denomination of lending plays an important role in the UK, while it is less important for HK, possibly due to the stable linked exchange rate system
Overall impact of international monetary policy spillover on banks’ lending is heterogeneous, determined by
financial linkages with systemic countries (UK banks)
or balance sheet characteristics of their parent banks (FBHKs)
Host country’ policy makers should take into account such heterogeneities when assessing the international spillover of monetary policy

37. (Some recent) Literature
Bank funding channel:
Morais, Peydro and Ruiz (2015) examine inward transmission f UK, US and euro area monetary policy to Mexico. Evidence for bank funding channel. Affiliates affected by own-country MP.
Temesvary, Ongena and Owen (2015) investigate how US monetary policy affects foreign lending of US-resident banks, investigating both cross-border claims and claims by affiliates abroad.
Cetorelli and Goldberg (2012a) find that having global operations insulates domestic banks from changes in domestic monetary policy as they can resort to internal capital markets
Portfolio channel:
Correa et al (2015) in a cross-country panel: tighter MP in source countries prompts banks to substitute away from domestic credit and toward foreign credit to safer locations and borrower types.
[1.1] An inward perspective on monetary spillovers through banks is provided for Mexico by Morais, Peydro and Ruiz (2015), analysing spillovers of UK, US and euro area monetary policy. Looser foreign monetary policy increases the supply of credit of foreign banks to Mexican firms. Each regional policy shock affects supply via their respective banks (for example, UK monetary policy affects credit supply in Mexico via UK banks).
Most of the foreign banks in Mexico are established as stand-alone subsidiaries, which one would expect to be more affected by domestic funding conditions than, say, branches of foreign banks, because the latter are more likely to receive funding from their parents. The paper does not identify a channel for the transmission.

38. (Some recent) Literature
Cetorelli and Goldberg (2012b) show that effects on foreign locations follow bank-specific pecking orders with locations differentiated by importance as funding sources and investment destinations.
Currency denomination:
Brauning and Ivashina (2017): following MP tightening cross- border/cross-currency liquidity flows back home implying lower swapping activity and marginal costs of funding foreign lending.
 leads, similar to the portfolio effect, to an increase in lending abroad
 this increase should, however, occur in the currency of the foreign market (sterling in our case) as lending in the currency of the home country is not subject to the lower marginal costs FX swaps.
One motivation of our focus on the currency denomination of lending is provided by
They highlight that banks’ funding is usually dominated in a different currency than the foreign assets banks intend to fund. But the price for such synthetic funding depends on the price of hedging FX exposures. They