XXV Edition

1-2 December 2016"

International Banking and Cross-Border Effects of Prudential Regulation: Lessons from the Euro Area

Zochowski Dawid, European Central Bank
Nocciola Luca, European Central Bank
Franch Fabio, European Central Bank

We analyze the cross-border propagation of prudential regulation in the euro area (EA). Using the IBRN Prudential Instruments Database (Cerutti et al., 2015) on changes in the macroprudential policy we estimate panel regressions for 248 banks from 16 EA countries to assess the magnitude of inward spillovers for two types of channels: via the adjustments of domestic banks’ lending to a changes in the macroprudential policy abroad and via the changes of foreign affiliates’ lending in reaction to the changes in the macroprudential policy by home authorities. For the first channel, we find that domestic banks reduce lending on average after the exposure-weighted tightening of capital requirements, while they increase lending when loan-to-value limits or reserve requirements are tightened. For the second channel, we find that foreign affiliates increase lending following the tightening of sector-specific capital buffers in the home country. More generally, instruments directed to specific borrowers, such as loan-to-value limits or sector specific requirements are prone to leakages, as EA banks seem to shift their foreign lending to other jurisdictions, while the tightening of capital requirements leads to a decrease in lending. We also find that bank characteristics such as size, capitalization and liquidity play a role in determining the magnitude of cross-border spillovers.

Area: Financial Stability

Keywords: macroprudential policy, cross-border spillovers, international bank lending, panel study, euro area

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