BIS Says ECB Stimulus Shows Currency Matters in Policy Spillover

  • Study suggests euro starting to act as global funding currency
  • Cross-border lending rose “considerably” as QE started in 2015

The European Central Bank’s asset-purchase program may have been designed to pump up the euro-area economy, but it also made waves abroad.

A study published on Sunday by the Bank for International Settlements shows the growth rate of cross-border bank claims rose considerably during the first quarter of 2015, when the ECB started quantitative easing. The expansion largely reflected lending to advanced economies outside the currency bloc, and indicates that currency denomination is a key factor in monetary-policy spillovers.

“For example, euro lending by Swiss banks to Poland can be affected by the ECB’s monetary policy, even though neither country is part of the euro area,” said researchers Stefan Avdjiev, Agne Subelyte and Elod Takats. “Given central banks’ extraordinary measures over the past years and the large shares of cross-border loans denominated in foreign currencies, our findings suggest policymakers should closely monitor the currency denomination of cross-border bank lending as they assess the potential impact of possible policy moves, both in their own economies and abroad.”

Euro-denominated claims grew 5.6 percent, almost four times as fast as other currencies’ claims at 1.5 percent, in the first quarter of 2015, the report by the Basel-based BIS showed. The gap was especially large for claims on advanced economies.

Lending to developed nations may have increased more than in emerging markets -- where the study found the effect to be “insignificant” -- because the former already have relatively large shares of credit denominated in euros.

The boost to claims can be explained by several channels, the researchers said. Monetary loosening by the ECB should ease financing conditions within and outside the currency bloc, cutting banks’ funding costs. There might also be a perceived improvement in the creditworthiness of foreign borrowers as the depreciating euro boosted up the net worth of their balance sheets. Another channel may have been the hedging demand of institutional investors, who may have tried to insure against further euro depreciation.

The research echoes work on the U.S. currency, suggesting that the euro cross-border bank-lending network responds to monetary-policy shocks in a similar manner.

“Our results imply that the U.S. dollar network is not unique,” the BIS researchers said. “This finding accords with emerging evidence that the euro is starting to take on some of the characteristics of the U.S. currency as a global funding currency.”

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