“Euro zone banks shifted the composition of their dollar and euro lending, cutting their dollar lending by more, despite the fact that European economies were more threatened by the debt crisis,” Stein and coauthors Victoria Ivashina and David Scharfstein, both Harvard University professors, said in a research paper released today by the central bank in Washington.
The paper investigates how curtailed financing resulting from Europe’s debt crisis -- which has pushed at least five euro nations into recessions and eroded investor and business confidence -- has impaired the U.S. economy through the banking system. Stein, a former Harvard University professor, has published academic research on monetary policy and financial markets throughout his career. He joined the Fed in May.
Stein and his coauthors show that European banks are cutting dollar loans more than euro loans because they obtain dollars in the “less stable” wholesale funding market while their euro loans are funded by deposits. While five Euro nations are in recession, the U.S. economy grew 2 percent in the third quarter of 2012, according to a Commerce Department report last week.
The paper does not attempt to measure the extent to which the reduction in U.S. loans from European banks has harmed the U.S., the authors write. “To some extent other banks -- either U.S. or non-European banks -- may have stepped in to fill the hole left by the retrenchment of the euro zone banks,” the economists said.
“Although dollar lending by foreign banks increases the supply of credit to U.S. firms during normal times, it may also prove to be a more fragile source of funding that transmits overseas shocks to the U.S. economy,” they said.
Stein, 52, is the newest member of the Fed’s board of governors. He was nominated by President Barack Obama in December to a term at the Fed lasting through January of 2018. Stein and Jerome Powell, an attorney and private equity investor, were confirmed by the U.S. Senate on May 17.
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