Unconventional-Policy Spillovers of U.S. Interest on Reserves within Global Dollar-Denominated Retail Loan and Deposit Markets

A linchpin of the Federal Reserve’s unconventional policies has been payment of interest on reserves, of which 16 to 44 percent have been held by foreign banks with U.S. subsidiaries, at a rate typically several basis points higher than other funds rates. This paper constructs a model with competition among domestic banks, foreign banks with domestic subsidiaries, and other foreign banks in dollar-denominated common and local retail markets for loans and deposits. The paper shows that the interest rate that the interest rate on reserves influences not only loan and deposit rates domestically but also in Eurodollar-denominated foreign retail markets. The paper also explores implications for steady-state adjustments and dynamic responses of balance sheets and retail rates to parameter changes and exogenous shocks.