Does US monetary policy uncertainty affect

cross-border banking flows?

Birendra B. Budha*
University of Connecticut

March 17, 2023

Preliminary

Abstract
This paper investigates the effect of US monetary policy uncertainty on cross-
border bank flows for a large number of countries. I use the bilateral cross-border
bank flows of 18 BIS-reporting countries to borrowers in 46 counterparty coun-
tries for 1985-2020. I find that an increase in US monetary policy uncertainty re-
duces cross-border bank lending. Banks reallocate their portfolio from foreign to
domestic borrowers in response to higher US monetary policy uncertainty. The
cross-border effects of uncertainty are higher in the countries with low capital
controls.

Keywords: US monetary policy uncertainty, international spillovers, cross-border

bank lending.

JEL Codes: E43, E44, E52, E58, F41, F42, G15

*I am thankful to Prof. Kanda Naknoi, .....

 2

1. Introduction
The growth of cross-border bank lending since the 1990s and its sensitivity to US
monetary policy in the crisis has underscored a question of what mainly drives such
cross-border loans. Accordingly, extensive literature has established that, in addi-
tion to local conditions, cross-border bank flows are affected by global factors, espe-
cially US monetary policy (e.g. Avdjiev and Hale, 2019; Albrizio et al., 2020; Miranda-
Agrippino and Rey, 2020) and global risk conditions proxied by VIX (e.g. Bruno and
Shin, 2015a; Avdjiev et al., 2020). Meanwhile, recent empirical works have shown the
impact of uncertainty on cross-border bank flows (e.g. Choi and Furceri, 2019; Ben-
etrix and Curran, 2020), but the effects of uncertainty regarding US monetary policy
on cross-border bank lending remains unexplored. I fill this gap in the literature
by exploring how uncertainty about the Federal Reserve’s policy affects cross-border
bank lending.
This paper studies how uncertainty about US monetary policy affects cross-border
bank flows.1 Specifically, I focus on the following research questions: how does cross-
border bank lending respond to US monetary policy uncertainty? Does banks in ori-
gin countries reallocate their portfolio towards domestic from foreign borrowers in
response to higher US monetary policy uncertainty? Do capital control measures
play a role in such response of cross-border lending? Do the effect of uncertainty
differ across advanced and emerging economy groups? To find the effects of un-
certainty, I use the bilateral cross-border bank claims from the Locational Banking
Statistics (LBS), a comprehensive cross-border bank lending data set, of the Bank for
International Settlements. As a measure of bank flows, I use the growth of cross-
border bank claims which includes cross-border loans, debt securities, and other
instruments.2 The LBS dataset is residency-based, and thus cross-border bank lend-
ing includes claims on banks and non-banks abroad in the destination country.3 The
final dataset includes cross-border bank claims at a quarterly frequency from 18 re-
porting to 46 counterparty countries for the period of 1985q1-2020q1. Moreover, I
use data on domestic bank credit to the non-financial sector from other BIS sources,
news-based US monetary policy indicator by Baker et al. (2016), and other variables

1
While describing the countries in the bilateral data, I use the terms “reporting”, “source” and “ori-
gin” countries interchangeably. These are the countries reporting their cross-border bank claims on
borrowers abroad. In other words, there are the countries from which credit originates. On the other
hand, I use the terms “counterparties”, “recipient” and “destination” country interchangeably.
2
Of total cross-border claims reported in the LBS on September end 2020, loans consists 65.6 per-
cent, debt securities 22.3 percent and other instruments about 12 percent. The LBS only records his-
torical series of total cross-border claims, but the disaggregated data at the bilateral level are available
for a shorter period. Moreover, almost all studies use cross-border claims while studying the behavior
of cross-border bank flows.
3
Due to the residency-based definition consistent with the Balance of Payments, banks report their
positions on an unconsolidated, standalone basis, including intragroup positions with subsidiaries
and other legal entities that are part of the same banking group.
 3

in the analysis. To find the effect of US monetary policy uncertainty on cross-border

bank lending, I regress the growth of cross-border bank claims on the US monetary
policy uncertainty and other control variables.
The key set of results are as follows. First, I find that an increase in uncertainty
about US monetary policy reduces cross-border bank lending. Quantitatively, a one
percent increase in US monetary policy uncertainty reduces cross-border bank claims
by 0.01 percentage points. Second, banks rebalance their loan portfolio from foreign
to domestic borrowers in response to higher US monetary policy uncertainty. A one
percent increase in US monetary policy uncertainty raises the growth differential be-
tween banks’ domestic claims to the private non-financial sector and cross-border
bank claims by 0.02 percentage points. Third, I document that the effect of uncer-
tainty is lower in the economies with higher capital inflows restrictions. Finally, there
is no significant difference between the effects of uncertainty on bank flows to ad-
vanced and emerging economies. These results suggest that policymakers should
also take into consideration uncertainty about US monetary policy while analyzing
global spillover from US monetary policy. These findings are robust to various alter-
native checks. For instance, the results are robust to using an alternative indicator
of US monetary policy uncertainty by Bauer et al. (2019), sub-samples considering
global financial crisis, alternative specifications, and other ways of clustering stan-
dard errors. Finally, these findings are robust to controlling gravity factors, bilateral
trade flows, and key banking sector characteristics.
The key to the identification of US monetary policy uncertainty effects in the
analysis is the use of bilateral cross-border bank flows from the LBS. This residency-
based data capture credit flows from banks in source (reporting) countries to all bor-
rowers abroad in destination (recipient) countries. With this bilateral nature of data,
it is possible to control separately for the factors driving the supply of cross-border
claims in source countries, credit demand factors of destination countries, and any
global push factors of international capital flows. This helps us exploit cross-country
heterogeneity in cross-border bank lending in both source and recipient countries.
Moreover, it is possible to include source-recipient fixed effects to control for any un-
observed time-invariant characteristics between source-recipient pairs. To identify
the effects, I further drop the US from borrower and lender countries to address any
reverse causality concern.
This paper contributes to several strands of literature on understanding the driver
of international bank lending. First, the paper connects to the evolving literature on
the impact of uncertainty on cross-border bank flows. In general, uncertainty may
make refinancing in interbank markets more difficult, increase credit risk; and raise
the probability that banks are hit by large shocks, resulting in tighter external financ-
ing (Buch et al., 2015; Valencia, 2017). In this context, Choi and Furceri (2019) show
that higher country-specific uncertainty, proxied by realized stock market volatility,
 4

decreases both cross-border bank lending (outflows) and cross-border bank borrow-
ing (inflows), based on the LBS of the BIS. Similarly, Choi et al. (2020) also document
the decline in cross-border bank credit in response to higher uncertainty, proxied
by the world uncertainty index- a measure of political and economic uncertainty.
Benetrix and Curran (2020) show that higher uncertainty, proxied by newspaper-
,volatility- and survey-based indicators, reduces cross-border bank funding. I con-
tribute to this area of literature by focusing on the uncertainty about US monetary
policy, rather than overall uncertainty, on cross-border lending.
Second, this paper also connects to the literature on the effect of US monetary
policy on international bank lending. Some works in this area include Correa et al.
(2018), Avdjiev et al. (2018), Temesvary et al. (2018), Avdjiev and Hale (2019), Cec-
chetti et al. (2020), Avdjiev et al. (2020), Albrizio et al. (2020), and Bräuning and
Ivashina (2020). These studies show that US monetary policy tightening causes a
significant decline in cross-border lending, and establishes it as a major driver of
international bank lending. Further, Takáts and Temesvary (2020) provide evidence
on the currency dimension of the international bank lending channel. Global banks
which lend borrowers abroad and also maintain foreign affiliates are at the heart of
the international bank lending channel of US monetary policy. US monetary policy,
a major driver of the global financial cycle, transmits globally through cross-border
bank lending (Miranda-Agrippino and Rey, 2020). In relation to this evolving lit-
erature, I depart from the conventional analysis of the effect of US monetary pol-
icy shocks and, instead, analyze how uncertainty about US monetary policy affects
cross-border bank flows.
Finally, this paper connects to the literature on the drivers of international bank
lending. Conventionally, it is well established that cross-border bank flows are largely
driven by interest rate differentials (e.g. Basso et al., 2011; McCauley et al., 2015) and
global risk conditions, proxied by the VIX (such as Avdjiev et al., 2020). Recent works
also establish the dollar as a global risk factor, affecting the risk-taking capacity of
banks and then the supply of cross-border credit (for instance Avdjiev et al., 2019a,b;
Krishnamurthy and Lustig, 2019). Likewise, cross-border bank flows are significantly
affected by monetary policy in both source and recipient countries (for instance Avd-
jiev et al., 2018; Albrizio et al., 2020), central bank transparency in the destination
country (Eichler et al., 2017), and independence of supervisory authority (Bremus
and Fratzscher, 2015). In view of these drivers of cross-border bank flows, especially
interest rate differential and global risk conditions, I show that uncertainty about US
monetary policy also matters for cross-border bank lending.
The paper is structured as follows. Section II presents data and summary statis-
tics. The empirical framework is presented in Section III. Results and robustness
exercises are presented in Section IV. Finally, Section V inspects the portfolio rebal-
ancing channel, and Section VI presents the role of capital control measures. The
 5

effects of uncertainty by income groups is presented in Section VII and asymmetric

effects is discussed in Section VIII. Finally, Section IX concludes.

2. Data
This section presents data and some motivating facts.

2.1 Data on cross-border and domestic bank lending

I use data on cross-border bank claims from the LBS of the Bank for International
Settlements. The LBS captures quarterly data on the outstanding claims and liabil-
ities of internationally active banks located in 48 reporting countries against coun-
terparties residing in more than 200 countries. The dataset is residency-based, that
is, banks report their positions on an unconsolidated, stand-alone basis, including
intragroup positions with subsidiaries and other legal entities that are part of the
same banking group (Bank for International Settlements, 2015). In this respect, the
LBS is aligned with the Balance of Payments (BOP) statistics. The key variable in the
analysis is the change in the cross-border bank claims (in log), adjusted for exchange
rate changes and break-in-series, from reporting (source or origin) to the destina-
tion (counterparty or recipient) countries. This measure is equivalent to the growth
of cross-border bank claims which includes claims on all borrowers (for all maturi-
ties) abroad: banks (including intragroup), non-banks, and unallocated by sectors.4
The major advantage of the LBS relative to the BOP banking flows is the detailed
geographical breakdown of the series by reporting (source) and counterparties (re-
cipient) countries. The availability of bilateral bank flows data allows us to disen-
tangle changes in cross-border bank flows driven by supply factors in the reporting
country from those of changes in the credit demand from the counterparty coun-
try (Correa et al., 2018). Additionally, the LBS dataset captures the currency com-
position of cross-border claims and liabilities. The cross-border banking flows de-
nominated in multiple currencies are expressed in the US dollar terms which are ad-
justed for movements in the exchange rate. With the availability of currency break-
down and reporting of breaks in series, the BIS computes break- and exchange rate-
adjusted changes in amounts outstanding, which approximate underlying flows dur-
ing a quarter.5 Such correction of valuation effects due to exchange rate variation
4
Claims include deposits and balances placed with banks, loans and advances to banks and non-
banks, and holdings of securities and participations. Of total cross-border claims $ 33210 billion by all
reporting countries in 2020q2, loans covers 65.6 percent ($ 21773 billion), debt securities 22.3.1 per-
cent ($ 7419.5 billion), other instruments 11.6 percent ($ 3849.5 billion), and unallocated 0.5 percent
($ 167.9 billion).
5
Such exchange rate adjusted flows are equivalent to the cross-border banking flows that are free
from any currency variation.
 6

allows for better interpretation of results by removing the responses to exchange

rate variations. Since the LBS only report exchange rate-adjusted flows, I construct
exchange rate-adjusted stocks of cross-border claims, following Choi and Furceri
(2019), as the cumulated sum of the exchange rate-adjusted flows, with the initial
value of exchange rate-adjusted stocks setting equal to the exchange rate-unadjusted
claims available from the LBS.
The LBS dataset covers observations beginning from 1977:Q4. However, its cov-
erage differs across countries, especially many advanced economies reporting data
since 1977, but most emerging economies reporting only after the 2000s. Given the
availability of US monetary policy uncertainty data only since 1985 and data con-
straints from other variables, the data includes an unbalanced panel for the period
1985Q1-2020Q1. Additionally, I exclude from the sample offshore financial centers
using the definition of the IMF and countries with less than 40 quarters of data avail-
ability.6 Following Correa et al. (2018) and Choi and Furceri (2019), I drop observa-
tions with less than $5 million or negative outstanding claims. Finally, given the data
constraints on other variables, the final sample includes 18 reporting (source) and 46
recipients (destination) countries. The detail of sample and variables is presented in
Table 1 and Appendix A.
In order to analyze the portfolio reallocation of banks between domestic and
foreign borrowers in response to higher US monetary policy uncertainty, I collect
data on domestic bank credit from other sources of the Bank for International Set-
tlements. This is because the LBS dataset does not include the historical series of
the claims of domestic banks on domestic borrowers located in the home country. I
address this limitation by combining the bank claims to the domestic private non-
financial sector from other sources of the BIS with the cross-border claims from the
LBS.7 These domestic claims include loan and debt securities extended to the private
non-financial sector (non-bank sectors). As an alternative proxy for domestic bank
credit, I also use data on the bank claims on the private sector and domestic bank
credit (to both private and public sector) from the International Financial Statistics
of the International Monetary Fund.8

2.2 US monetary policy uncertainty

As a benchmark indicator, I use the news-based measure of US monetary policy un-
certainty by Baker et al. (2016) from their website: http://www.policyuncertainty.com.
6
Offshore financial centers are used by corporations or banks to arrange financial transactions
whose funds are redirected elsewhere for their final use (Avdjiev et al., 2014). I exclude these centers
because the behavior of offshore financial centers might differ significantly from other countries.
7
The detail of the bank claims on the domestic private non-financial sector is available in Dem-
biermont et al. (2013)
8
The line 32 and 32d of the International Financial Statistics includes domestic credit (claims) and
claims on the private sector of depository corporation survey.
 7

This index captures the perceived uncertainty of the public about the US Federal Re-
serve’s monetary policy. Using 10 major US newspapers, Baker et al. (2016) compute
US monetary policy uncertainty as one of the sub-categories of overall economic
policy uncertainty. The index is based on the number of articles in these US news-
papers that contain a triplet of terms related to uncertainty, the economy, and policy
plus a set of categorical terms (at least one term) related to US monetary policy.9 To
deal with the changes in the overall volume of articles across newspaper and time,
Baker et al. (2016) adjust the raw counts by the total number of articles in the same
newspaper and month and further standardize to create an index for US monetary
policy uncertainty. Given its computation based on the newspapers, this indicator
represents the perceived uncertainty of the broad population about US monetary
policy.
Additionally, I use a market-based measure of US monetary policy uncertainty by
Bauer et al. (2019) in the robustness checks. This indicator captures financial market
participants’ uncertainty about the Federal Reserve’s monetary policy. It is based
on Eurodollar futures and options. This index is available on a daily basis which I
average to get a quarterly index of US monetary policy uncertainty.

2.3 Other variables

I collect data on other control variables: target (recipient), source (sender), and global
controls. I obtain data on MSCI indices from Bloomberg, gross domestic product,
and interbank rates from the International Financial Statistics of the IMF. Likewise, I
collect data on policy rates and nominal exchange rates from the BIS. In addition, I
collect policy rates for Japan and Indonesia from the FRED maintained at the Federal
Reserve Bank of St. Louis, and for Ukraine and Bulgaria from the respective central
bank websites. I obtain data on shadow policy rates for Australia, UK, Japan, and the
Euro area from Krippner (2013, 2016). For the time period before 1995, I proxy the
Euro area policy rate by Germany’s interbank rate. Likewise, I collect data on the VIX
index, federal funds rate, US growth rate, and S&P500 from the FRED of the Federal
Reserve Bank of St. Louis. The VIX index is implied volatility in S&P500 index option
prices computed by Chicago Board Options Exchange. The shadow federal funds
rate for the US is taken from Wu and Xia (2016).
Additionally, I take data on the current account to GDP ratio for most countries
from OECD and computes for Peru, Philippines, Thailand, Romania, and Ukraine
based on the IFS data. I obtain data on gravity factors from Mayer and Zignago (2011)
9
The categorical set of US monetary policy related terms include federal reserve, the fed, money
supply, open market operations, quantitative easing, monetary policy, fed funds rate, overnight lend-
ing rate, the fed, Bernanke, Volker, Greenspan, central bank, interest rates, fed chairman, fed chair,
lender of last resort, discount window, European Central Bank, ECB, Bank of England, Bank of Japan,
BOJ, Bank of China, Bundesbank, Bank of France, Bank of Italy.
 8

and bilateral trade flows between the source and recipient countries from the Direc-
tion of Trade Statistics from the IMF. Finally, I collect data on the inflation rates from
the Bank for International Settlements. Thus, to explore this association further, the
next section presents the empirical framework.

2.4 Summary statistics

Table 2 presents summary statistics for the cross-border bank claims and other vari-
ables employed in the analysis. As shown in the table, the growth of cross-border
claims adjusted for exchange rate changes is averaged about 1.5 percent in the sam-
ple period. The average of log news-based US monetary policy uncertainty index is
4.37 with a standard deviation of 0.49. The table also shows summary statistics of
variables related to the source country, recipient country, global/US economy, and
bilateral trade.
Figure 1 presents the size of total cross-border claims of source countries in the
sample as a percent of GDP in 2019Q3. The cross-border bank lending by advanced
economies’ banking system is very large compared to emerging counterparts. For
instance, cross-border lending by the UK is 640.27 percent of GDP, but such lend-
ing by Mexico is only 5.75 percent. Figure 2 shows the evolution of cross-border
lending of source countries in terms of GDP. The figure shows a marked increase
in cross-border flows from the 1990s to the global financial crisis 2007. Cross-border
lending declined sharply during the crisis in 2002 and 2007. For example, the cross-
border bank lending by the UK was about 285.81 percent of GDP in 1990Q4, which
increased to a maximum of 881.21 percent in 2009Q1, and declined to 539.85 percent
in 2017Q1. After the financial crisis 2007, it declined in most of the countries in the
sample until 2014Q1.
Figure 3 shows the growth of total cross-border claims of the countries in the
sample and US monetary policy uncertainty. Both series have significant variation
over time. For instance, the growth of cross-border claims declined markedly during
the global financial crisis 2007. The unconditional correlation between the growth
of cross-border claims and US monetary policy uncertainty is -0.13, indicating that
cross-border claims is negatively associated with US monetary policy uncertainty.
Figure 4 shows the relative importance of cross-border bank lending in bank credit
in the economy. The figure presents cross-border bank claims in percent of domes-
tic bank credit to the private sector in the fourth quarter of 2019. The ratio is highest
amounting 153.2 percent for UK, and lowest 4.03 percent for China. On average, the
ratio is 52.07 percent for AEs and 26.2 percent for EMs. This fact implies that foreign
bank lending plays an important in credit flows globally. Moreover, the higher ratio
of cross-border claims to domestic bank credit indicates the potential exposure of
these economies to foreign monetary policy. Thus, to explore this association fur-
 9

ther, the next section presents the empirical framework.

3. Empirical framework
This section presents an empirical framework to explore the effect of US monetary
policy uncertainty on cross-border banking flows.
Following the literature on cross-border banking flows such as Correa et al. (2018),
Choi and Furceri (2019), and Takáts and Temesvary (2020), I estimate the following
panel regression:

us
∆ln(Yi,j,t ) = αi,j + βM P Ut−1 + γ ′ Xi,t−1 + δ ′ Zj,t−1 + ψ ′ Gt−1 + ϕ′ Hi,j,t−1 + εi,j,t (1)

where i and j denote the source (reporting) and destination (target or counter-
party) countries respectively; Yi,j,t is the stock of cross-border claims held by all banks
us
in a source country i to all borrowers in destination country j in quarter t; and M P Ut−1
is US monetary policy uncertainty in quarter t−1. Xi,t−1 is a set of source or reporting
country control variables; Hi,j,t−1 is a set of any bilateral (source-recipient country)
control variables; Zj,t−1 is a set of destination or target country variables, and Gt is the
set of global and US control variables. αi,j is source-destination country pair fixed ef-
fects and εi,j,t is residuals. In specification (1), the dependent variable, ∆ln(Yi,j,t ) is
the bilateral cross-border bank flows from source country i to destination country j,
measured by the difference in log of claims from quarter t − 1 to t. Following Bruno
and Shin (2015b) and Choi and Furceri (2019), I enter all explanatory variables with
a one-quarter lag to mitigate any reverse causality or endogeneity issues that may
arise from any feedback effects of cross-border bank lending on other explanatory
variables. I cluster standard errors at the source and recipient country pair levels
and also consider other ways of clustering in robustness checks.
The main regressor of interest in the specification is lagged US monetary policy
us
uncertainty, M P Ut−1 , and the associated coefficient of interest is β. Following Choi
and Furceri (2019), I enter lagged US monetary policy uncertainty in the regression
to capture larger impact and address any concern of reverse causality.10 β is the re-
sponse of cross-border banking flows to US monetary policy uncertainty. I conjec-
ture that cross-border bank flows declines in response to higher US monetary policy
uncertainty, implying a negative coefficient, β. Such decline in global bank flows may
be due to an increase in risk and tighter refinancing conditions in the international
financial market.
It is important to consider that cross-border bank flows are driven by demand
conditions in the recipient country, supply conditions in the source (reporting) coun-
10
Choi and Furceri (2019) argue that bank credit flows slowly respond to any shocks compared to
other types of capital flows such as bond and equity.
 10

try, and global factors. The central to the identification is to control for the demand,
supply, and global factors. The bilateral structure of cross-border bank flows allows
to control for all these factors and thus identifies the effects of US monetary pol-
icy uncertainty. Thus, I include a number of variables in the specification: source
controls, target controls, and global variables. Global and US controls, Gt−1 , include
US GDP growth, VIX index, federal funds rate, and S&P500 annual return. US GDP
growth, a proxy for economic activity in the US, may affect the financial conditions
of the global banks and thus cross-border bank flows. VIX index, a measure of the
global risk conditions, significantly drives cross-border flows (Avdjiev et al., 2020;
Cerutti et al., 2017). I include the federal funds rate as an indicator of US mone-
tary policy which is also a driver of cross-border flows (Avdjiev et al., 2020; Albrizio et
al., 2020). I also control for S&P500 annual return following capital flows literature.
Recipient country controls, Zj,t−1 include GDP growth, domestic monetary policy
rate, MSCI annual return, inflation rate, growth in nominal exchange with US dol-
lar, and current-account to GDP ratio. These variables control for any demand-side
factors in cross-border bank flows. It is expected that improved domestic macroeco-
nomic conditions affect cross-border lending positively. For instance, cross-border
bank lending should be associated positively with the recipient country’s GDP growth,
monetary policy rate, and MSCI stock return. On the contrary, it should be negatively
affected by the current account deficit and exchange rate depreciation. The effect of
inflation is prior ambiguous. If higher inflation signals a better economic perfor-
mance, cross-border lending should increase along with inflation. Similarly, I con-
trol for the supply side factors in cross-border banking by including source or lender
country’s controls, Xi,t−1 . I include GDP growth, monetary policy rate, and inflation
of source countries. These variables mainly control macroeconomic conditions in
the source countries where the global banks reside and extend lending to borrowers
abroad.
Additionally, the use of dydatic data on cross-border flows further helps to iden-
tify the clean effect of US monetary policy uncertainty on cross-border flows. I in-
clude the source-recipient country pair fixed effects, αi,j , to control for any unob-
served time-invariant features between source country i and recipient country j, es-
pecially gravity factors in the model of international trade and finance. Moreover,
to address any concern of reverse causality from cross-border banks to the US mon-
etary policy uncertainty, I exclude the United States from both the source (i) and
recipient (j) country list, that is, the sample does not include cross-border claims by
banks located in the US and claims on borrowers residing in the US.
After the crisis, central banks of advanced economies implemented the uncon-
ventional monetary policy which reduces interest rates to the zero lower bound.
Since these monetary policy rates may not reflect policy interventions for the post-
GFC period, I use shadow policy rates for the US by Wu and Xia (2016), and for the
 11

Euro area, Japan, New Zealand, UK, and Australia by Krippner (2016). I include bilat-
eral trade variables as additional controls in the robustness checks.

4. Empirical results

4.1 Baseline results

Table 3 presents the benchmark results from estimating equation (1). Due to the
limited data availability of some control variables, I begin with the estimation of (1),
including the core set of control variables to the full set of controls in column 6 of Ta-
ble 3. The dependent variable is the growth of cross-border bank claims from source
country i to recipient country j. As discussed earlier, I first include monetary policy
rates of the source country and destination country separately, and then all together
with the US federal funds rate in the benchmark specification. In column 6, the esti-
mation includes all control variables.
The results show that the coefficient of US monetary policy uncertainty is neg-
ative and statistically significant, suggesting the decline in cross-border flows in re-
sponse to higher uncertainty. More specifically, a one percent increase in US mone-
tary policy uncertainty reduces cross-border bank lending by 0.01 percentage points
in the estimation with the full set of controls in column 6 of Table 3. The main finding
is consistent with previous results that higher overall economic uncertainty damp-
ens cross-border flows (Choi and Furceri, 2019; Choi et al., 2020; Benetrix and Cur-
ran, 2020). This novel evidence shows that US monetary policy uncertainty drives
global cross-border bank lending.
The results also show that the sign of coefficients on other drivers of cross-border
bank flows are consistent with the previous findings. On the demand or recipient
country side, cross-border bank claims increase in response to higher GDP growth
and return in recipient or destination country. This evidence supports the conven-
tional hypothesis that higher growth attracts more international investors, resulting
in more international lending, as shown in previous works such as Correa et al. (2018)
and Cerutti et al. (2017). The coefficient on the monetary policy rate of the recipient
or borrower country is positive and significant, indicating that monetary tightening
raises cross-border lending to that country. This finding is in line with Avdjiev et al.
(2018) who argue that international substitution effects after monetary tightening
can offset the conventional (contractionary) effects, that is, global banks may raise
lending to the country with increased risk-free rate relative to others by taking the
slack left by local banks.11
11
Avdjiev et al. (2018) hypothesize international substitution effects and conventional effects of
monetary tightening in the borrower or recipient country. After tightening, credit by local banks
would fall with the deterioration of the financial situation, including increased funding costs and
tightened liquidity. On the contrary, global banks may substitute for such reduction in lending by
 12

Additionally, cross-border bank lending decreases in response to the depreciation

of domestic currency vis-a-vis the US dollar. This finding is consistent with the risk-
taking channel of Bruno and Shin (2015a) and the US dollar as a risk factor (such as
Avdjiev et al., 2019a,b; Krishnamurthy and Lustig, 2019). Providing similar evidence,
Cerutti et al. (2017) argue that such a negative sign on exchange rate may reflect two
facts: (i) the effects of flight to quality to the US (during risk-off episodes), and (ii)
concerns for borrower’s creditworthiness. In the first case, the dollar appreciates, the
demand for US safe assets increases, and cross-border bank flows decline. Likewise,
the depreciation of domestic currency vis-a-vis the US dollar also implies the weaker
balance sheet of dollar-funded borrowers. Cross-border bank claims is positively
associated with inflation.12 The coefficient on current account to GDP is negative,
suggesting that cross-border lending is negatively associated with a higher current
account deficit.
Turning to the role of global factors in driving cross-border bank flows, the results
support previous empirical findings in the literature. The coefficient of the federal
funds rate is significant and negative, suggesting that a monetary tightening by the
US Federal Reserve reduces cross-border bank lending. This evidence is in line with
findings in Bruno and Shin (2015a), Bräuning and Ivashina (2020), and Albrizio et
al. (2020). Likewise, cross-border bank lending is negatively associated with S&P500
annual return and VIX (a measure of the US stock market volatility and global risk
aversion). These findings are also consistent with earlier literature such as Bruno
and Shin (2015a), Correa et al. (2018), and Avdjiev et al. (2020). Finally, higher US
GDP growth raises the cross-border lending by global banks which is consistent with
the finding in Reinhardt and Riddiough (2015), and Avdjiev et al. (2020). Higher US
growth can affect the profitability and liquidity of global banks which then affects
cross-border bank lending.
On the source country side, the coefficient of the monetary policy rate is signifi-
cant and positive in benchmark specification. This implies that monetary tightening
in lender countries raises cross-border lending by banks abroad. In line with previ-
ous findings, this evidence supports the cross-border portfolio rebalancing by global
banks (Correa et al., 2018) and the conventional contractionary effect of tightening
outweighed by its international substitution effects (Avdjiev et al., 2018). As per the
conventional channel, monetary tightening is expected to reduce credit growth. But,
in response to such tightening, global banks may take advantage of relatively cheaper
funding and rebalance their portfolio towards safe/dollar assets or shifts their lend-
ing from less creditworthy domestic borrowers to safer foreign borrowers (Correa et

local banks by extending more cross-border credit (to take advantage of interest rate differentials).
12
The effect of inflation on cross-border bank flows is ambiguous in the literature. Inflation may be
associated with strong economic performance, causing more cross-border lending such as in Benetrix
and Curran (2020). On the other hand, higher inflation may deter cross-border flow, as shown in
Cerutti et al. (2017), reflecting the aversion to inflation risk.
 13

al., 2018; Avdjiev et al., 2018). Thus, the positive sign on the monetary policy rate is
consistent with the larger cross-border portfolio rebalancing than the conventional
effect. Additionally, the effect of GDP growth is not significant in the full set of con-
trols in column 5. Finally, higher inflation in lender countries is associated with the
decrease in cross-border lending by banks abroad.

4.2 Robustness checks

I conduct robustness tests of the baseline results in this section.
Alternative measure of US monetary policy uncertainty. First, I check whether
the baseline results are robust to an alternative indicator of US monetary policy un-
certainty. Note that the baseline results are based on the news-paper based indica-
tor of US monetary policy. An additional way is to capture financial market partici-
pants’ uncertainty over US monetary policy, called market-based measure by Bauer
et al. (2019). While the news-paper based index captures current and expectations
of future monetary policy uncertainty of the general population, the market-based
measure captures only the uncertainty of the participants in financial markets. The
column 1 of Table B.1 presents the results by including a market-based measure of
uncertainty which confirms the robustness of baseline results.
Sub-samples considering global financial crisis. The Federal Reserve imple-
mented quantitative easing (QE) after the financial crisis which may have changed
the way that uncertainty about the Fed’s policy affects international capital flows.
Thus, I further examine whether the baseline results are robust to the samples in
pre-crisis, post-crisis, and excluding the financial crisis. The results of this exercise
are presented from columns 2 to 4 of Table B.1. Higher US MPU reduces cross-border
capital flows in all these estimations.
Controlling for gravity factors. In the benchmark specification, I include source-
recipient country pair fixed effects to control for any time-invariant characteristics
between source and recipient countries. Instead of country pair fixed effects, I con-
trol for gravity factors in international finance: the population-weighted distance
between country pairs (in log), the log of the product of areas of country pairs, the
dummies whether a country pair shares a common border, religion, colonial rela-
tionship, and official language. Data on gravity factors are from Mayer and Zignago
(2011). Column 5 of Table B.4 shows the results after controlling the gravity factors,
which also confirms the robustness of the baseline results. As expected, the log dis-
tance coefficient is significant and negative, suggesting that distance between coun-
tries reduces the bilateral bank flows. This is in line with the earlier findings about the
effect of distance on bank flows (Papaioannou, 2009; Wang, 2018). Likewise, cross-
border bank flows between countries is positively associated with the area of coun-
try pairs and common religion. But, time difference, colonial relationship, common
 14

border, and common official language do not impact cross-border bank flows.
Controlling for trade flows. The use of country-pair fixed effect and gravity fac-
tors in the estimation controls for any time-invariant characteristics between source
and recipient countries. But, there may other time-varying factors between coun-
tries which may affect bilateral bank flows. One such important factor is bilateral
trade flows between countries. The literature also provides evidence of trade-finance
nexus, showing both goods trade and bank flows go in tandem (Kalemli-Ozcan et al.,
2010). I collect bilateral trade flows between the source and recipient countries from
the IMF’s Direction of Trade Statistics. Then, I estimate regression (1) by controlling
lagged export growth, import growth, and total trade (normalized by GDP or total
population) from source country i to recipient country j. I normalized total trade
(exports and imports) by dividing total GDP (or total population) of both source i
and recipient country j. Table B.3 presents the results of this exercise. The baseline
results are robust even after controlling the bilateral trade flows. The coefficients
on all these bilateral trade variables are positive and significant, implying that both
cross-border bank claims and trade in goods move in tandem.
Alternative specifications and clustering. Further, I present the results with other
ways of clustering standard errors and estimation. Column 1 of Table B.2 shows
the results of pooled OLS, and column 2 shows OLS results, including a dummy
for source and recipient country separately. In column 3, I present the results of
fixed effect estimation where standard errors are clustered at the recipient country
level. And, for comparison purposes, the baseline results are repeated in column 4.
I find that all results are quantitatively and qualitatively similar, further confirming
the baseline results.
Additional banking sector controls. Finally, I examine the robustness of the re-
sults by adding banking sector variables in the regression. Earlier empirical works
show that the health of the domestic banking system, especially profitability and
solvency, plays a role in driving cross-border bank lending (e.g. Reinhardt and Rid-
diough, 2015; Bruno and Shin, 2015a). It is expected that cross-border bank lending
should respond to the profitability and the solvency of the domestic banking system
along with macroeconomic conditions. To address this issue, I combine the data on
the banking system from the Global Financial Development Database of the World
Bank with the main dataset. I consider deposit money banks’ return on equity or
assets as an indicator of the profitability and the ratio of capital to total assets as a
proxy for solvency.
Table B.4 shows the results of adding banking sector controls in the regression.
I lagged banking sector variables by four quarters in the estimation to address any
endogeneity concern because of the availability of banking sector data at an annual
frequency from the World Bank. The coefficients on US monetary policy are simi-
lar to the baseline results, further confirming the robustness of the baseline finding.
 15

As expected in the literature, the coefficients of deposit money banks’ return on as-
sets and equity are statistically significant and positive, suggesting that global banks
lend more to the banking system with higher profitability. But, the ratio of domestic
banks’ capital to the asset has no significant impact on cross-border lending. These
results are in line with earlier findings in Bruno and Shin (2015b) and Reinhardt and
Riddiough (2015).

5. Inspecting the portfolio rebalancing channel

Given the robust evidence established earlier that higher US monetary policy uncer-
tainty reduces cross-border bank lending, I move to the second question: do banks
rebalance their portfolio toward domestic borrowers from foreign counterparts due
to heightened uncertainty about US monetary policy and associated global financial
conditions? During the period of increased US monetary policy uncertainty, one can
expect the erosion of net worth and thus the increase in relative riskiness of foreign
borrowers. As a result, if global banks consider domestic borrowers relatively safer,
one should expect portfolio rebalancing by banks away from foreign toward domes-
tic borrowers.13
In order to test the portfolio rebalance channel, I combine the data on cross-
border lending of the LBS with that on bank credit to the domestic private non-
financial sector from other sources of the BIS. One limitation of combining these
two series is that cross-border claims include the credit to both banks and non-bank
sectors, but domestic bank claims include the credit to the private non-financial sec-
tor. The key difference comes from interbank lending which is not included in the
domestic bank credit but included in cross-border bank claims. Despite this limita-
tion, I use this domestic credit proxy because of its historical series for all countries
in the sample.
By stacking data on domestic bank credit with cross-border bank claims, I com-
pute a new dependent variable and estimate the regression on the same set of re-
gressors as in the specification (1). I compute the difference between the growth rate
of domestic bank credit to the private non-financial sector and cross-border claims
following Correa et al. (2018), which can be written as Growth dif f = ∆ln(Di,t ) −
∆ln(Yi,j,t ). Here, Yi,j,t is total cross-border claims of banks in reporting country i to
borrowers in destination country j in quarter t, and Di,t is total bank credit to the pri-
vate non-financial sector in country i in quarter t. By taking this dependent variable,

13
Previously, Choi and Furceri (2019) show that global banks rebalance their portfolio towards for-
eign from domestic borrowers in response to higher uncertainty in the reporting or source country.
Likewise, Correa et al. (2018) show that banks rebalance their portfolio towards foreign borrowers in
response to tighter domestic monetary conditions.
 16

I estimate the following regression as in specification (1):

us
Si,j,t = αi,j + βM P Ut−1 + γ ′ Xi,t−1 + δ ′ Zj,t−1 + ψ ′ Gt−1 + ϕ′ Hi,j,t−1 + εi,j,t (2)

Where S stands for the growth differential (Growth dif f ), i and j stand for re-
porting and destination country respectively. The coefficient β shows the differen-
tial response of domestic and cross-border credit flows to the US monetary policy
uncertainty. The positive β indicates the portfolio rebalancing by banks from foreign
to domestic borrowers in response to higher US monetary policy uncertainty and
associated financial conditions.
Table 4 shows the results of estimating specification (2). In column 1, the depen-
dent variable is the difference between the growth of domestic bank credit to the
private non-financial sector (taken from the BIS) and cross-border bank claims. As
expected, the coefficient on the US monetary policy uncertainty is positive and sta-
tistically significant implying that banks reallocate their portfolios from foreign to
domestic borrowers in response to higher US monetary policy uncertainty. One per-
cent increase in US monetary policy uncertainty raises growth differential by 0.02
percentage points. The results further show the negative impact of recipient country
GDP growth, and increase in MSCI annual return, monetary policy rate, and infla-
tion. On the other hand, an increase in current account deficit and exchange rate
depreciation further increase the growth differential between domestic bank credit
and cross-border claims. Likewise, an increase in the federal funds rate and S&P an-
nual return raises the growth differential while US GDP growth reduces the growth
differential.
Finally, in columns 2 and 3, I present the results of estimating specification (2)
using the alternative proxy for domestic bank credit taken from the IMF’s Interna-
tional Financial Statistics (Depository Corporation Survey). In column 2, the proxy
for domestic bank credit is the claims on the private (domestic) sector, and in col-
umn 3, the proxy is domestic credit to both the private and public sectors of the IFS
(line 32). Using these alternative proxies for domestic bank credit, I compute the
growth differential and estimate specification (2). The coefficient of US monetary
policy uncertainty is positive and statistically significant, confirming the robustness
of the results even using these alternative proxies.

6. Role of capital control measures

It is important to consider that cross-border bank lending may be affected by the
restrictions on capital flows in and out of countries. As shows in Fernández et al.
(2016), capital control measures vary significantly across countries and over time.
Thus, it is reasonable to expect that restrictions on capital inflows and outflows may
 17

affect not only the lending by global banks abroad but also the way US monetary
policy affects cross-border lending. To analyze the role of capital control measures, I
use data on capital inflows and outflows restrictions by Fernández et al. (2016). The
data includes overall capital inflows and outflows restriction indices for the period of
1997-2017. The data is available for 43 recipients and all 18 source countries in the
sample at an annual frequency.
I lagged the capital inflows and outflows control indices by four quarters in the
estimation based on equation (1) to address any reverse causality issues given its
availability at an annual frequency. The estimation includes the capital inflows re-
striction index for the recipient country and the capital outflows restriction index of
the source country. Table 5 presents the results of this estimation. As in baseline
results, the coefficient of US monetary policy uncertainty is significant and nega-
tive even after controlling capital control measures. The coefficients of capital in-
flows restriction in the recipient country are negative and significant. This suggests
that cross-border bank lending becomes lower with higher inflows restrictions in the
destination country. But, capital outflows restriction in the source country does not
play a significant role in cross-border lending. Additional coefficient of interest is
the interaction term between US monetary policy uncertainty and capital control
measures. As expected, the coefficient of interaction with inflows restriction is sig-
nificant and positive, implying that the effect of US monetary policy uncertainty be-
comes weaker on the destination countries with higher capital inflows restriction
measures. But, no such significant effect is found in the case of the source country’s
capital outflows measures. These are just basic findings and a more refined analysis
may be required for the reasons behind these findings.

7. Advanced vs emerging economies

Now, I turn the analysis to whether the effect of US monetary policy uncertainty on
cross-border bank lending depends on counterparty risk. To test this hypothesis,
I simply divide countries into advanced and emerging economy groups based on
the IMF classification. In response to higher uncertainty about US monetary policy,
global banks may reduce their lending more to borrowers in the relatively risky econ-
omy (emerging markets) than safer one (advanced economies). To examine whether
the effect of uncertainty differs across advanced and emerging economy groups, I
estimate the baseline equation including the indicator for emerging market dummy
and its interaction with US monetary policy uncertainty.
Column 5 in Table 5 reports the results of this exercise where the EM dummy is
the indicator variable taking the value of 1 if the country is an emerging market and 0
otherwise. Here, the coefficients of interest are US monetary policy uncertainty and
its interaction with EM dummy. The coefficient of US monetary policy uncertainty
 18

is negative and significant as in the baseline finding. But, the coefficient of the in-
teraction term is insignificant, indicating no significant difference in the effects of
uncertainty between the advanced and emerging economy group. This finding sug-
gests that global banks reduce their cross-border claims regardless of the location of
borrowers in advanced or emerging economies.

8. Conclusion
The rapid growth of cross-border bank lending since the 1990s has highlighted the
need to understand the drivers of international bank lending. This paper focuses on
the role of US monetary policy uncertainty as a driver of cross-border bank lending.
Additionally, I study whether global banks reallocate their portfolio towards domes-
tic from foreign borrowers in response to higher US monetary policy uncertainty. I
also examine the role of capital control measures, and income level in the effects of
uncertainty, as well as its asymmetric effects.
I use data on bilateral cross-border bank claims from the Locational Banking
Statistics of the Bank for International Settlements. This bilateral data allows for
cleaner identification of US monetary policy uncertainty by controlling for the fac-
tors affecting credit demand and supply as well as global factors. I find that cross-
border bank claims declines in response to heightened uncertainty about the US
monetary policy. Moreover, banks rebalance their portfolio from foreign to domes-
tic borrowers in response to higher US monetary policy uncertainty. Likewise, the
effect of US monetary policy uncertainty is larger on the economies with low capital
inflows restrictions. There is no significant difference in the effects of uncertainty
on the advanced and emerging economy groups. Finally, I did not find asymmet-
ric effects of US monetary policy uncertainty. These findings are robust to an alter-
native indicator of US monetary policy uncertainty, sub-samples considering crisis,
alternative specification and controlling bilateral trade, gravity factors, and banking
sector characteristics.
This paper has important policy implications. Given the role of US monetary pol-
icy uncertainty as a driver of cross-border lending, it is important that policymakers
should pay attention to its evolution over time. Not only the US monetary policy
drives international bank lending but uncertainty about its future path also drives
cross-border lending. The question addressed in this paper can be extended in a
couple of ways. One possible extension may be to examine micro-level data (bank-
firm loan level data) to examine the richer dynamic of the response of cross-border
lending. Additionally, there remains to incorporate US monetary policy uncertainty
in intentional banking model and examine the dynamic responses of cross-border
lending.
 19

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 22

600
Cross-border claims, % of GDP
400
200
0

AUS

AUT

BEL

BRA

CAN

CHL

DEU

DNK

FIN

FRA

GBR

GRC

JPN

KOR

MEX

NLD

SWE

ZAF

Figure 1: Total cross-border bank lending by source countries, 2019Q2

Notes: This figure shows total cross-border bank lending by banks of source countries in the sample.
Total bank lending is expressed in percent of gross domestic product.
 23

Table 1: List of countries in the sample

S.N. Source country Income group S.N. Recipieint country Income group
1 Australia AE 1 Argentina EM
2 Austria AE 2 Australia AE
3 Belgium AE 3 Austria AE
4 Brazil EM 4 Belgium AE
5 Canada AE 5 Brazil EM
6 Chile EM 6 Bulgaria EM
7 Denmark AE 7 Canada AE
8 Finland AE 8 Chile EM
9 France AE 9 China EM
10 Germany AE 10 Colombia EM
11 Greece AE 11 Czech Republic AE
12 Japan AE 12 Denmark AE
13 Mexico EM 13 Estonia AE
14 Netherlands AE 14 Finland AE
15 South Africa EM 15 France AE
16 South Korea AE 16 Germany AE
17 Sweden AE 17 Greece AE
18 United Kingdom AE 18 Hungary EM
19 India EM
20 Indonesia EM
21 Israel AE
22 Italy AE
23 Japan AE
24 Latvia AE
25 Lithuania AE
26 Malaysia EM
27 Mexico EM
28 Netherlands AE
29 New Zealand AE
30 Norway AE
31 Peru EM
32 Philippines EM
33 Poland EM
34 Portugal AE
35 Romania AE
36 Russia EM
37 Slovakia AE
38 Slovenia AE
39 South Africa EM
40 South Korea AE
41 Spain AE
42 Sweden AE
43 Thailand EM
44 Turkey EM
45 Ukraine EM
46 United Kingdom AE
Note: This table presents the list of source and recipient countries. The countries are fur-
ther divided into the advanced (AE) and emerging market economies (EM) groups.
 24

Table 2: Summary statistics

Variables Mean Std. Dev. Minimum Maximum

Dependent variables
Total bilateral cross-border bank claims (log change) 0.015 0.323 -5.035 5.121
Credit growth diff., domestic vs cross-border -0.005 0.31 -5.05 5.15
Explanatory variables
News-based US monetary policy uncertainty 4.65 0.41 3.70 5.86
Market-based Us monetary policy uncertainty 0.518 0.215 0.134 1.035
Recipient country
Real GDP growth 0.031 0.058 -1.379 1.872
Policy rate 7.484 17.94 -8.579 350.5
Inflation 2.285 0.855 0 9.511
Current account to GDP -0.909 5.195 -25.11 18.93
MSCI annual return 0.045 0.342 -1.957 5.349
Nominal exchange rate growth 0.015 0.096 -0.432 2.908
Return on assets 0.705 1.873 -29.12 7.403
Return on equity 9.581 15.3 -211.1 70.59
Capital to asset ratio 8.035 2.894 2 23
Source country
Real GDP growth 0.022 0.028 -0.143 0.132
Policy rate 3.87 6.026 -8.579 65.72
Inflation 1.953 0.662 0 8.707
Global/US controls
Real GDP growth, US 2.466 1.664 -3.9 5.3
Federal fund rate 2.495 2.745 -2.922 7.899
S&P500 annual return 0.073 0.152 -0.536 0.35
VIX 2.902 0.323 2.332 4.071
Bilateral trade
Growth of exports 0.016 0.383 -5.681 7.399
Growth of imports 0.017 0.348 -9.758 9.948
Total trade to GDP, adjusted -9.646 3.031 -20.01 -2.022
Total trade to population, adjusted 14.48 2.007 5.17 20.43
Note: This table presents summary statistics of cross-border bank lending, US monetary policy uncertainty,
and other control variables related to the recipient country, source country, US/global economy and bilat-
eral trade. Credit growth differential is the difference of the log change of domestic bank credit to the private
non-financial sector and cross-border bank claims.
 25

800
Cross-border claims, % of GDP
600
400
200
0

1980q1

1990q1

2000q1

2010q1

2020q1
Year

Median Mean
Max-min

Figure 2: Cross-border bank lending by source countries

Notes: This figure shows the evolution of total cross-border bank lending of source countries over the
period 1977-2020. The blue dotted line and solid red line represent mean and median cross-border
bank lending in the sample. The light blue shaded region shows the maximum and minimum cross-
border bank lending (in % GDP) over the period of time.
 26

300

30
US monetary policy uncertainty

Growth of cross-border claims

20
200

10
100

-10 0
0
1985q1

1990q1

1995q1

2000q1

2005q1

2010q1

2015q1

2020q1
Years

US monetary policy uncertainty

Growth of total cross-border bank claims

Figure 3: Growth of cross-border lending and US monetary policy uncertainty

Notes: This figure displays the growth of total cross-border bank lending of all source countries in
the sample and US monetary policy uncertainty over the sample period 1985-2020. The light dark
shaded area represents the period of the financial crisis.
 Cross-border bank claims (% of domestic credit)

0 50 100 150

Argentina
Australia
Austria
Belgium
Brazil
Canada
Chile
China
Colombia
Czech Republic
Denmark
Finland
France
Germany

total domestic bank credit to the private sector.

Greece
Hungary
India
Indonesia
Israel
Italy
Japan
Malaysia
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
Russia
South Africa
South Korea

Figure 4: Cross-border bank claims relative to domestic bank credit

Spain
Sweden
27

Thailand
Turkey
United Kingdom

tic bank credit to the private sector in 2019Q4. This shows the size of cross-border claims relative to
Notes: This figure shows cross-border bank claims (on the countries indicated) in percent of domes-
 28

Table 3: Effect of US monetary policy uncertainty on cross-border bank flows

Growth of cross-border bank claims
Variables (1) (2) (3) (4) (5) (6)
US monetary policy uncertainty -0.028*** -0.029*** -0.028*** -0.028*** -0.028*** -0.026***
(0.004) (0.004) (0.004) (0.004) (0.004) (0.004)
Recipient controls
Real GDP growth 0.106** 0.158*** 0.108** 0.162*** 0.176*** 0.224***
(0.044) (0.040) (0.044) (0.041) (0.041) (0.047)
MSCI annual return 0.043*** 0.039*** 0.043*** 0.038*** 0.038*** 0.041***
(0.005) (0.005) (0.005) (0.005) (0.005) (0.007)
Exchange rate growth -0.260*** -0.303*** -0.255*** -0.294*** -0.300*** -0.343***
(0.031) (0.034) (0.030) (0.034) (0.034) (0.040)
Monetary policy rate 0.000 0.000 0.000 0.001***
(0.000) (0.000) (0.000) (0.000)
Inflation 0.000** 0.001**
(0.000) (0.000)
Current account (% GDP) -0.001**
(0.000)
Source controls
Real GDP growth 0.194** 0.175* 0.183* 0.156* 0.159* 0.178*
(0.092) (0.094) (0.093) (0.094) (0.094) (0.099)
Monetary policy rate 0.003 0.005** 0.005** 0.006***
(0.003) (0.002) (0.002) (0.002)
Inflation -0.002* -0.003**
(0.001) (0.001)
Global/US controls
Real GDP growth, US 0.005*** 0.005*** 0.005*** 0.005*** 0.004*** 0.005***
(0.002) (0.002) (0.002) (0.002) (0.002) (0.002)
Federal fund rate -0.016*** -0.015*** -0.016*** -0.016*** -0.016*** -0.017***
(0.004) (0.004) (0.004) (0.004) (0.004) (0.004)
S&P annual return -0.060*** -0.057*** -0.061*** -0.059*** -0.059*** -0.069***
(0.012) (0.012) (0.013) (0.012) (0.013) (0.014)
VIX -0.018** -0.016** -0.017** -0.015** -0.014* -0.018**
(0.007) (0.007) (0.007) (0.007) (0.007) (0.008)
Source-recipient FE Yes Yes Yes Yes Yes Yes
R2 0.008 0.008 0.008 0.008 0.008 0.009
Observation 41272 40584 41272 40584 40584 36868
Country pairs 527 527 527 527 527 519
Note: The table reports the fixed effect regression based on equation (1). The dependent variable is the growth
rates of exchange rate-adjusted cross-border bank claims in all estimations. All independent variables are
lagged by one quarter. Variables definitions are included in Appendix A. Heteroskedasticity-robust standard
errors are reported in parentheses. Standard errors are clustered at the source-recipient levels. *** denotes
1%, **, denotes 5% significance level, and * denotes 10% significance level.
 29

Table 4: Portfolio reallocation between domestic and foreign credit

Growth differentials
Variables (1) (2) (3)
US monetary policy uncertainty 0.022*** 0.040*** 0.043***
(0.004) (0.010) (0.010)
Recipient controls
Real GDP growth -0.163*** -0.136 -0.118
(0.047) (0.097) (0.099)
MSCI annual return -0.031*** -0.031** -0.035**
(0.006) (0.014) (0.014)
Exchange rate growth 0.344*** 0.340*** 0.326***
(0.040) (0.081) (0.084)
Monetary policy rate -0.001*** -0.009*** -0.010***
(0.000) (0.002) (0.003)
Inflation -0.001*** -0.001* -0.001
(0.000) (0.001) (0.001)
Current account (% GDP) 0.001*** 0.001* 0.001*
(0.000) (0.001) (0.001)
Source controls
Real GDP growth 0.051 -0.211 -0.274
(0.099) (0.187) (0.190)
Monetary policy rate -0.001 -0.005 -0.003
(0.002) (0.006) (0.006)
Inflation 0.002 0.001 0.003
(0.001) (0.002) (0.002)
Global/US controls
Real GDP growth, US -0.005*** -0.006 -0.007*
(0.002) (0.004) (0.004)
Federal fund rate 0.019*** 0.027*** 0.030***
(0.004) (0.010) (0.010)
S&P annual return 0.004 0.010 0.023
(0.014) (0.032) (0.032)
VIX -0.001 0.031** 0.035**
(0.008) (0.014) (0.014)
Source-recipient FE Yes Yes Yes
R2 0.007 0.008 0.009
Observation 36868 13950 13480
Country pairs 519 231 231
Note: The table reports the fixed effect regression based on equation (2).
The dependent variable is the growth differential, that is, the difference
between the growth rate of domestic bank credit to private non-financial
sector and cross-border bank claims. In column 1, the proxy for domes-
tic bank credit is the bank claims on the private non-financial sector
from the BIS. Similarly, the proxy is the claims on the private (domes-
tic) sectors (in column 2) and domestic claims on both private and pub-
lic sector (in column 3) from the IMF’s International Financial Statistics.
All independent variables are lagged by one quarter. Heteroskedasticity-
robust standard errors are reported in parentheses. Standard errors are
clustered at the source-recipient levels. *** denotes 1%, ** denotes 5%
significance level, and * denotes 10% significance level.
 30

Table 5: Capital controls, asymmetric effects and heterogeneity by income level

Growth of cross-border bank claims

Variables
(1) (2) (3) (4) (5) (6)

US monetary policy uncertainty -0.042*** -0.031*** -0.035*** -0.037*** -0.028*** -0.024***

(0.007) (0.005) (0.005) (0.006) (0.005) (0.007)
US MPU× EMS dummy 0.006
(0.007)
US MPU× Asymmetry dummy -0.006
(0.010)
Inflows restriction -0.142** -0.022 -0.022 -0.139**
(0.065) (0.013) (0.013) (0.064)
Inflows restriction×US MPU 0.026* 0.025*
(0.014) (0.014)
Outflows restriction -0.000 0.125 -0.001 0.119
(0.013) (0.113) (0.013) (0.112)
Outflows restriction×US MPU -0.026 -0.025
(0.024) (0.024)
Recipient controls Yes Yes Yes Yes Yes Yes
Source controls Yes Yes Yes Yes Yes Yes
Global/US controls Yes Yes Yes Yes Yes Yes
Source-recipient FE Yes Yes Yes Yes Yes Yes
R2 0.010 0.010 0.010 0.010 0.009 0.009
Observation 32914 32914 32914 32914 36868 36868
Country pairs 498 498 498 498 519 519
Note: The table reports the fixed effect regression based on equation (1), including additional variables and
dummies. The dependent variable is the growth rates of exchange rate-adjusted cross-border bank claims in
all estimations. All independent variables are lagged by one quarter. To economize the space, only capital
flows restrictions and interaction of dummies with US monetary policy uncertainty (US MPU) are reported.
EMS dummy takes the value of 1 for emerging markets and 0 for other economies. Likewise, the asymmet-
ric dummy takes the value of 1 if US monetary policy uncertainty is increasing and 0 if it is decreasing. Other
variables definitions are included in Appendix 3.A. Heteroskedasticity-robust standard errors are reported in
parentheses. Standard errors are clustered at the source-recipient levels. *** denotes 1%, ** denotes 5% sig-
nificance level, and * denotes 10% significance level.
 31

A. Variables definitions

A.1 Dependent variable

Cross-border bank credit flows. It is the quarterly growth of outstanding cross-
border bank claims adjusted for exchange rate changes in reporting (source) coun-
tries to borrowers located in destination (counterparty or recipient) countries. Cross-
border bank claims include claims on all sectors (of the destination country): banks,
non-banks, and unallocated by sectors. The data is taken from the Locational Bank-
ing Statistics of the Bank of International Settlements.
Credit growth differential. It is the difference between the growth of domestic
bank credit to private non-financial sector and cross-border bank claims (to all sec-
tors). The data on domestic bank credit to the private non-financial sector is taken
from the BIS. As an alternative proxy, the proxy for domestic bank credit is the claims
on the private sector and domestic bank claims (on both private and public sector)
from the IMF’s International Financial Statistics.

A.2 Explanatory variables

US monetary policy uncertainty. It is the log of the US monetary policy uncertainty
index by Baker et al. (2016). In the robustness analysis, it is proxied by a market-
based measure by Bauer et al. (2019).
GDP growth. It is quarterly changes in the GDP growth of source and destina-
tion countries as well as the United States. I obtain these data from International
Financial Statistics of the IMF and the FRED of the Federal Reserve Bank at St. Louis.
Monetary policy rate. It is defined as the change in the monetary policy rate of
source and destination countries. Source: Bank for International Settlements, the
FRED at the Federal Reserve at St. Louis, Central Bank Websites, the shadow policy
rates by Krippner (2016) from https://www.ljkmfa.com/.
MSCI annual return. It is computed as a four-quarter change in the log MSCI
index for reporting and destination countries. Source: Bloomberg.
Inflation. It is a percentage change in the CPI index for both reporting (source)
and destination countries. Source: Bank for International Settlements.
Current account in percent of GDP. It is the ratio of current account surplus to
the GDP of destination countries. Source: Organization for Economic Co-operation
and Development, and computed based on the IMF data for Peru, Philippines, Thai-
land, Romania, and Ukraine.
Federal funds rate. It is the quarterly change in the federal funds rate. Source:
the FRED at Federal Reserve Bank at St. Louis and the shadow rate by Wu and Xia
(2016) from their website.
VIX. It is defined as a quarterly change in the log of the COBE VIX index. It is an
 32

indicator of global risk aversion and measures the market expectation of stock mar-
ket volatility over the following 30-day period. Source: the FRED at Federal Reserve
Bank at St. Louis.
S&P annual return. It is a four-quarter change in the log S&P500 index. Source:
the FRED at Federal Reserve Bank at St. Louis.
Exchange rate growth. It is a quarterly change in the log of the nominal exchange
rate of recipient (destination) country with the US dollar. The positive value implies
the depreciation of the recipient country’s currency. Source: Bank for International
Settlements and International Monetary Fund.
Exports, imports, and total trade. Export and import growth are defined as a
quarterly change in the log of exports and imports of source country to destination
countries. In order to compute total trade adjusted for population and GDP, I fol-
low Kalemli-Ozcan et al. (2010) and adopt the following steps. First, I compute the
ratio of exports (imports) from the source country to the destination country to the
total population (or GDP) of both source and destination countries. I normalize by
taking the log of these variables, and then take an average of both variables to have
total trade adjusted for GDP and population. Source: Direction of Trade Statistics
of the IMF for trade-related variables, GDP from the IMF’s International Financial
Statistics, and population from Mayer and Zignago (2011).
Gravity factors. The gravity factors include common border, common official
language, distance, colonial relation, time difference, common religion, and area.
The dummy for the common border is 1 if source and destination countries share
a common border. The dummy for common official language is 1 if both source
and destination countries have a common official language. The dummy for colony
takes the value of 1 if source and destination countries have ever in colonial relation.
The time difference is defined as the log of the time difference between source and
destination countries in the number of hours. Common religion is the index of reli-
gious proximity between source and destination countries. Distance is the log of the
weighted bilateral distance between source and destination countries (weighted by
population). Likewise, the area is the log of the multiplication of the areas (in square
kilometers) of source and destination counties. I take all gravity variables from Mayer
and Zignago (2011).
Return on assets, return on equity, and capital to asset ratio. The capital to asset
ratio is defined as the ratio of total bank capital divided by bank assets of the desti-
nation countries. Return on assets is bank’s return on assets after tax (in percent)
of the destination countries. Return on equity is the bank return on equity (in per-
cent) after tax of the destination countries. Source: Global Financial Development
Database, the World Bank.
Capital inflows and outflows restrictions. Inflows restriction is the capital in-
flows restriction index, normalized between 0 and 1, of the destination country. Out-
 33

flows restriction is the index of capital outflows restriction index, normalized be-
tween 0 and 1, of the reporting country. Source: Fernández et al. (2016).

B. Robustness checks
 34

Table B.1: Robustness (I): Alternative MPU and sub-samples with crisis
Market- Before After cri- Excluding
Variables based MPU crisis sis crisis
(1) (2) (3) (4)
US monetary policy uncertainty -0.108*** -0.033*** -0.010* -0.026***
(0.021) (0.013) (0.006) (0.005)
Recipient controls
Real GDP growth 0.235*** 0.110 0.193*** 0.296***
(0.047) (0.072) (0.060) (0.054)
MSCI annual return 0.052*** 0.008 0.013 0.036***
(0.006) (0.012) (0.009) (0.007)
Exchange rate growth -0.354*** -0.218*** -0.351*** -0.314***
(0.041) (0.070) (0.048) (0.048)
Monetary policy rate 0.001*** 0.001** 0.005* 0.001**
(0.000) (0.000) (0.002) (0.000)
Inflation 0.001*** 0.000 0.001* 0.001***
(0.000) (0.000) (0.000) (0.000)
Current account (% GDP) -0.001*** 0.001 -0.001 -0.001**
(0.000) (0.001) (0.001) (0.000)
Source controls
Real GDP growth 0.181* -0.124 0.112 0.241**
(0.100) (0.196) (0.118) (0.105)
Monetary policy rate 0.008*** 0.002 0.010*** 0.007***
(0.002) (0.003) (0.003) (0.002)
Inflation -0.002* -0.004 -0.007*** 0.001
(0.001) (0.003) (0.002) (0.002)
Global/US controls
Real GDP growth, US 0.005*** -0.016*** 0.005** -0.001
(0.002) (0.004) (0.003) (0.002)
Federal fund rate -0.011** 0.025*** -0.039*** 0.002
(0.004) (0.008) (0.006) (0.004)
S&P annual return -0.062*** 0.013 -0.018 -0.088***
(0.014) (0.036) (0.024) (0.016)
VIX -0.026*** -0.012 -0.016* -0.028***
(0.008) (0.021) (0.009) (0.010)
Source controls Yes Yes Yes Yes
R2 0.009 0.004 0.009 0.007
Observation 36095 11849 25019 32870
Country pairs 519 457 519 519
Note: The table reports the fixed effect regression based on equation (1). The depen-
dent variable is the growth rates of exchange rate-adjusted cross-border bank claims in
all estimations. All independent variables are lagged by one quarter. The estimation
in (1) includes US monetary policy uncertainty by Bauer et al. (2019). News-based US
monetary policy indicator by Baker et al. (2016) is used in columns (2), (3), and (4). The
estimation in column (2) includes only the pre-crisis sample, column (3) includes the
post-crisis sample and column (4) estimate excluding the global financial crisis period
2007q3-2009q3. Variables definitions are included in Appendix 3.A. Heteroskedasticity-
robust standard errors are reported in parentheses. Standard errors are clustered at the
source-recipient levels. *** denotes 1%, ** denotes 5% significance level, and * denotes
10% significance level.
 35

Table B.2: Robustness (II): Alternative specification and clustering

Pooled Pooled Clustered Clustered

Variables OLS (I) OLS (II) S. E. (I) S. E. (II)
(1) (2) (3) (4)
US monetary policy uncertainty -0.028*** -0.027*** -0.026*** -0.026***
(0.005) (0.005) (0.004) (0.004)
Recipient controls
Real GDP growth 0.180*** 0.225*** 0.224*** 0.224***
(0.050) (0.058) (0.078) (0.047)
MSCI annual return 0.041*** 0.042*** 0.041*** 0.041***
(0.008) (0.008) (0.010) (0.007)
Exchange rate growth -0.346*** -0.344*** -0.343*** -0.343***
(0.043) (0.043) (0.062) (0.040)
Monetary policy rate 0.001* 0.001* 0.001 0.001***
(0.001) (0.001) (0.001) (0.000)
Inflation 0.000 0.001 0.001** 0.001**
(0.000) (0.000) (0.000) (0.000)
Current account (% GDP) -0.000 -0.001* -0.001 -0.001**
(0.000) (0.001) (0.001) (0.000)
Source controls
Real GDP growth 0.293*** 0.184* 0.178 0.178*
(0.088) (0.096) (0.128) (0.099)
Monetary policy rate 0.006** 0.006** 0.006*** 0.006***
(0.003) (0.003) (0.002) (0.002)
Inflation -0.001 -0.003* -0.003** -0.003**
(0.001) (0.002) (0.001) (0.001)
Global/US controls
Real GDP growth, US 0.004** 0.005** 0.005*** 0.005***
(0.002) (0.002) (0.002) (0.002)
Federal fund rate -0.016*** -0.017*** -0.017*** -0.017***
(0.005) (0.005) (0.005) (0.004)
S&P annual return -0.070*** -0.070*** -0.069*** -0.069***
(0.018) (0.019) (0.019) (0.014)
VIX -0.019** -0.018** -0.018*** -0.018**
(0.009) (0.009) (0.007) (0.008)
Source country FE No Yes No No
Recipieint country FE No Yes No No
Source-recipinet FE No No Yes Yes
R2 0.010 0.011 0.009 0.009
Observatioins 36868 36868 36868 36868
Country pairs 519 519
Note: The table reports the regression with pooled OLS, alternative ways of clustering
with fixed effect regression, and including gravity factors. The dependent variable is the
growth rates of exchange rate-adjusted cross-border bank claims in all estimations. Both
columns (1) and (2) shows the results of pooled OLS, but column (2) includes source and
recipient country FE. Columns (3) and (4) shows the results of fixed-effect regression in
equation (1). In column (3), standard errors are clustered at the recipient country level
whereas column (4) simply shows the baseline results. Variables definitions are included
in Appendix 3.A. Heteroskedasticity-robust standard errors are reported in parentheses.
Standard errors are clustered at the source-recipient levels. *** denotes 1%, ** denotes
5% significance level, and * denotes 10% significance level.
 36

Table B.3: Robustness (III): Controlling bilateral trade flows

Growth of cross-border bank claims
Variables (1) (2) (3) (4) (5)
US monetary policy uncertainty -0.029*** -0.029*** -0.029*** -0.037*** -0.028***
(0.004) (0.004) (0.004) (0.005) (0.004)
Recipient controls
Real GDP growth 0.177*** 0.185*** 0.185*** 0.177*** 0.178***
(0.042) (0.042) (0.042) (0.042) (0.042)
MSCI annual return 0.035*** 0.036*** 0.034*** 0.035*** 0.036***
(0.005) (0.005) (0.005) (0.005) (0.006)
Exchange rate growth -0.269*** -0.279*** -0.252*** -0.244*** -0.263***
(0.034) (0.034) (0.034) (0.035) (0.035)
Monetary policy rate 0.000 0.000 0.000 0.000 0.000
(0.000) (0.000) (0.000) (0.000) (0.000)
Inflation 0.000* 0.000** 0.000* 0.000 0.000**
(0.000) (0.000) (0.000) (0.000) (0.000)
Source controls
Real GDP growth 0.174* 0.158* 0.161* 0.143 0.161*
(0.094) (0.094) (0.094) (0.097) (0.094)
Monetary policy rate 0.005** 0.005** 0.005** 0.003 0.005**
(0.002) (0.002) (0.002) (0.002) (0.002)
Inflation -0.002* -0.002* -0.002* -0.003* -0.002*
(0.001) (0.001) (0.001) (0.001) (0.001)
Global/US controls
Real GDP growth, US 0.004*** 0.004*** 0.004*** 0.005*** 0.004***
(0.002) (0.002) (0.002) (0.002) (0.002)
Federal fund rate -0.017*** -0.016*** -0.016*** -0.019*** -0.016***
(0.004) (0.004) (0.004) (0.004) (0.004)
S&P annual return -0.060*** -0.061*** -0.062*** -0.077*** -0.061***
(0.013) (0.013) (0.013) (0.013) (0.013)
VIX -0.014* -0.014* -0.014* -0.015* -0.013*
(0.007) (0.007) (0.007) (0.008) (0.007)
Bilateral trade
Exports growth 0.043*** 0.039***
(0.012) (0.012)
Imports growth 0.040*** 0.036***
(0.010) (0.010)
Total trade adj. GDP 0.084***
(0.015)
Total trade adj. Population 0.062***
(0.016)
Source-recipinet FE Yes Yes Yes Yes Yes
R2 0.009 0.009 0.010 0.011 0.009
Observation 40326 40326 40326 34935 40326
Country pairs 527 527 527 527 527
Note: The table reports the fixed effect regression based on equation (1). The dependent vari-
able is the growth rates of exchange rate-adjusted cross-border bank claims in all estimations. All
independent variables are lagged by one quarter. Variables definitions are included in Appendix
3.A. Heteroskedasticity-robust standard errors are reported in parentheses. Standard errors are
clustered at the source-recipient levels. *** denotes 1%, ** denotes 5% significance level, and *
denotes 10% significance level.
 37

Table B.4: Robustness (IV): Banking sector variables and gravity factors

Growth of cross-border bank

Variables claims

(1) (2) (3)

US monetary policy uncertainty -0.036*** -0.035*** -0.033***

(0.006) (0.006) (0.005)
Banking sector controls
Return on assets (ROA) 0.007***
(0.002)
Return on equity (ROE) 0.001***
(0.000)
Capital to asset ratio 0.001 0.001
(0.005) (0.005)
Gravity factors
Common border -0.003
(0.004)
Common official language 0.004
(0.003)
Distance -0.005*
(0.003)
Colonial relation -0.003
(0.004)
Time difference 0.000
(0.001)
Common religion 0.009*
(0.005)
Area 0.011***
(0.002)
Source-recipinet FE Yes Yes Yes
Recipient macro controls Yes Yes Yes
Source macro controls Yes Yes Yes
Global/US controls Yes Yes Yes
R2 0.010 0.010 0.013
Observation 29286 29286 31098
Country pairs 497 497
Note: The table reports the fixed effect regression based on equation (1).
The dependent variable is the growth rates of exchange rate-adjusted cross-
border bank claims in all estimations. All independent variables are lagged
by one quarter. To economize the space, only the banking sector and grav-
ity factors are reported with US monetary policy uncertainty. Variables def-
initions are included in Appendix A. Heteroskedasticity-robust standard er-
rors are reported in parentheses. Standard errors are clustered at the source-
recipient levels. *** denotes 1%, ** denotes 5% significance level, and * de-
notes 10% significance level.