Authors: Nicola Cetorelli and Linda S. Goldberg

The globalization of banking in the United States is influencing monetary policy transmission by way of the lending channel both domestically and in foreign markets. Using quarterly information from all U.S. banks filing call reports between 1980 and 2005, we find evidence of a lending channel for monetary policy in large banks, but only those that serve the domestic market and have no international operations. We show that the large banks that operate globally rely on internal capital markets with their foreign affiliates to help smooth domestic liquidity shocks. We also show that the existence of such internal capital markets contributes to an international propagation of domestic liquidity shocks to lending by affiliated banks abroad. While these results indicate a substantially more active lending channel than is documented in Kashyap and Stein (2000), they also imply that the lending channel within the United States is declining in strength as banking becomes more
globalized.