This paper analyzes the drivers of cross-border bank lending to 49 Emerging Markets (EMs)
during the period 1990Q1-2014Q4, by assessing the impact of monetary, financial and real
sector shocks in both the US and the euro area. The literature has traditionally highlighted the
influence of US monetary policy on driving cross-border bank flows, and more recently the
importance of both US and Euro Area (EA) financial/banking sectors’ related variables. Our
contribution is the simultaneous analysis of the role of these US and EA drivers, as well as
their interactions with real sector shocks. We corroborate the negative impact of US monetary
policy tightening on cross-border lending to EMs, but we find that EA monetary policy seems
to have an impact mostly on Emerging Europe, reflecting the fact that cross-border lending to
most other EM regions is dollar denominated. We also find that real sector shocks in both the
US and EA trigger an increase in cross-border lending, but less in EA when modeling the
financial sector. Finally, for financial sector shocks, such as those associated with a decrease
in bank leverage, our results indicate a broad-based overall contraction of cross-border lending
if the shock originates in the US, and heterogenous effects across borrowing regions if the
shock originates in the EA.
US vs. euro area: Who drives cross-border bank lending to EMs?
