Cross-Border Bank Funding and Lending in a Monetary Union: Evidence from Slovenia

Abstract We propose a novel way, based on the liability composition of banks and firms, to identify a shock to the supply of foreign funds to banks, and investigate its dynamic effects on bank lending to firms, output, and prices. We find that the increase in the supply of foreign funds to banks generates a strong and persistent increase in lending and output, while prices increase with a delay. Shocks to the supply of foreign funds to banks are also an important driver of business cycles, bank lending, and the co-movement between bank loans and output. When we distinguish between the behaviour of domestic and foreign-owned banks, we find that foreign-owned banks are slower in passing the increase in foreign funding to firms.