The ADBI annual conference, Tokyo, 1-2 December 2016

Comments on
Asynchronous monetary policies and international dollar
credit evidence from bank-level data by Dong He, Eric
Wong, Kelvin Ho and Andrew Tsang

Ying Xu
Australian National University

The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development
Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences
of their use. Terminology used may not necessarily be consistent with ADB official terms.
What the paper is about
The paper studies the effect of divergent monetary policies on supply of
dollar loans by global banks

They employ a theoretical model of global bank lending behaviour to

analyse the mechanisms through which monetary policies affect global
banks dollar lending

They use a confidential dataset on external positions of global banks

domiciled in HK to examine determinants of dollar lending and then assess
the net effects of divergent MP policies on the supply of dollar credit
Overall comments
Highly relevant to academic literature and policy making (in light of recent
development in monetary policies in the U.S., euro zone, and Japan);
addressing the most important macro issues (e.g. international monetary
spillovers, global liquidity, and international financial stability)

Very comprehensive and sophisticated empirical analyses

FE model to test and establish a positive relationship between CB balance sheets
policies (BSP) and dollar lending by global banks; global banks balance sheet
characteristics matter for their dollar lending responses to changes in CB BSPs

VAR estimations and Monte Carlo simulations to estimate the net impact of
divergent CB BSPs on the supply of dollar loans ; tail risk analysis to test factors
contributing to extreme declines in the supply of dollar credit
Discussion on the model
The equilibrium level of dollar loans:

Mechanism:
Changes in BSP affect the level of costless home currency funding D or dollar funding
D*, therefore L*

Discussion:
Above is neither the only nor the major mechanism that BSPs affect dollar lending
Changes in BSPs affect the relative supply and, through changes in exchange rate
expectations, the relative demand of dollars in the FX swap market and accordingly
swap cost, w
Cost of funding and FX swap market could be more vigorously modelled to provide
an integrating theoretical framework
Discussion on the empirics
The FE model

Discussion:
Home country monetary policy responses and coordination
corr , may be high
Changes in Home and Fed CB BS affect FX swap costs
corr , may also be high
Discussion on the empirics
The FE model

Discussion
Is a two-way error component model able to remove country-specific
demand-side shocks? Probably not.
= +
: unobserved time-invariant country-specific effect
: unobserved time-specific effects
Because country-specific demand shocks vary across time so not captured
by , but possibly by
Policy implications
Contractionary effects of the U.S. monetary normalization offset by
expansionary effects of monetary policies in the euro area and Japan
Sustainable? How long will it last?
NIRP same as BSP?

If the goal is to managing global liquidity, FX swap lines may be simpler

and more effective policy tools