DP14128 The Effect of U.S. Stress Tests on Monetary Policy Spillovers to Emerging Markets*
This paper shows that monetary policy and prudential policies interact. U.S. banks
issue more commercial and industrial loans to emerging market borrowers when U.S.
monetary policy eases. The effect is less pronounced for banks that are more constrained
through the U.S. bank stress tests, reflected in a lower minimum capital ratio
in the severely adverse scenario. This suggests that monetary policy spillovers depend
on banks’ capital constraints. In particular, during a period of quantitative easing
when liquidity is abundant, banks are more flexible, and the scope for adjusting lending
is larger when they have a bigger capital buffer. We conjecture that bank lending
to emerging markets during the zero-lower bound period would have been even higher
had the United States not introduced stress tests for their banks.