Deputy Governor Karolina Ekholm

1. Discussion of “Banking Globalization, Transmission, and Monetary Policy Autonomy” by Linda GoldbergConference on “Two Decades of Inflation Targeting”Stockholm, 3 June 2013 DeputyGovernor Karolina Ekholm

2. Summary • Background: Increased globalization of banks raises questions about the consequences for efficiency and stability. • Some evidence in favor of positive effects on both accounts… • …but the experience in connection with financial crisis has generated some doubts. • Main question: Does the presence of global banks make it more difficult to pursue autonomous monetary policy? • Shown in previous work that presence of global banks may weaken lending channel domestically, but strengthen international transmission of shocks and policy (Cetorelli and Goldberg, 2012a).

3. Deleveraging by European banks involved reduced lending in AsiaEuropean banks’ exposures to countries in Asia, USD billion Source: BIS Note. The data in the chart refers to banks which report to the BIS. Japan is excluded from countriesin Asia.

4. Summary (cont’d) • Analysis: Estimation of whether presence of foreign banks makes local interest rate more dependent on interest rate of base currency. • Starting point analysis of the relationship between monetary sovereignty, exchange rates and capital controls in Obstfeld, Shambaughand Taylor (2005). • Main result: The presence of foreign banks seems to have little effect. • The important factor for monetary policy autonomy is exchange rate regime • Interesting in view of studies suggesting that pegs do not peg and floats do not really float.

5. Discussion • Implication of globalization of banks for central bank policy important and under-researched subject. • Data availability limiting factor • Important issues regarding globalization of banks: • Is globalization a reflection of too-big-to fail? • If so, are SIFI surcharges sufficient to deter “excessive” globalization? • Or, are uncertainties regarding recovery and resolution of cross-border banks so large that there is “too little” globalization? • In a crisis, how does one determine real need for liquidity support to avoid simply creating opportunity for arbitrage?

6. Discussion (cont’d) • Important issues regarding autonomy of monetary policy: • How does foreign policy affect expectations of domestic monetary policy? • What role does the exchange rate play in shaping those expectations? • Difficult to draw firm conclusions from analysis. • Solely host country perspective of banks. What about home countries? • Is nationality of parent important? Whether it coincides with base currency? • Endogeneity and simultaneity issues? • Quantification of results? Perhaps simulate response for particular type of country. Baltic states?

7. Deleveraging by Swedish banks, but perhaps less than with domestic banksSwedish banks’ lending in the Baltic States, EUR million Sources: The banks’ annual reports and the Riksbank

8. Discussion (cont’d) • Would it make sense to use set-up as in di Giovanni and Shambaugh (2008)? • Relate base currency interest rates to growth in GDP and then study channels. • What about including macroprudential policy? • Typical response to accommodative monetary policy by countries with pegs. Possible conjecture that presence of global banks makes policy less effective.