The Impact of the Deposit Channel on the International Transmission of Monetary Shocks

What role do bank deposits play in the international transmission of US monetary policy shocks? Using a panel of US commercial banks, we find that the deposit channel acts on global banks to transmit US monetary policy shocks internationally. Specifically, we document that after a 1 p.p. unexpected increase to the Fed Funds rate, global banks increase deposit spreads on average by 0.2 p.p. and experience a 2.9% decline in deposit growth. As a result, global banks increase growth rates of net transfers from foreign branches by 39.4% to finance lending. Moreover, we find that global banks reduce lending growth by half as much as domestic banks per percent of deposit outflow. Finally, global banks contract foreign lending growth by 1.3%.