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Tracking Foreign Capital: The Effect of Capital Inflows on Bank Lending in the UK

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  • Christiane Kneer

    (Bank of England)

  • Alexander Raabe

    (Asian Development Bank)

Abstract

This paper examines how UK banks channel foreign capital to the individual sectors of the domestic economy and to overseas residents. Information about the source countries of foreign funds deposited with UK banks allows us to construct a novel Bartik instrument for capital flows. Our results suggest that foreign inflows boost bank lending to the domestic economy. This is driven by the positive effect of foreign inflows on bank lending to non-financial firms and to other domestic financial institutions. We find that banks do not channel capital inflows to households or the public sector. Much of the foreign capital is also channeled back abroad, reflecting the role of the UK as a global financial center.

Suggested Citation

  • Christiane Kneer & Alexander Raabe, 2024. "Tracking Foreign Capital: The Effect of Capital Inflows on Bank Lending in the UK," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(4), pages 1279-1319, December.
    • Handle: RePEc:pal:imfecr:v:72:y:2024:i:4:d:10.1057_s41308-023-00215-w
    DOI: 10.1057/s41308-023-00215-w
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    More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F30 - International Economics - - International Finance - - - General
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G00 - Financial Economics - - General - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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