ESRB publishes a working paper that examines the cross-border spillover of the effects of the nationally implemented macro-prudential policy. The findings support the existence of cross-border spillovers from macro-prudential policy. The study finds that the overall effect from more macro-prudential regulation is highly dependent on the income group of the countries in which banks operate.
The results of the study, which involved data from a set of 157 countries, show that the effect of nationally implemented macro-prudential policy measures indeed spill across borders via international bank lending. The spillovers from macro-prudential policy measures are of opposite signs for advanced market economies and for emerging and developing market economies. This difference could be explained by the differences in how thoroughly macro-prudential regulation can be implemented and to what extent banks can engage in regulatory arbitrage. For macro-prudential policy measures targeting borrowers, the results are not as clear-cut, but some spillovers appear to exist. For banks operating in advanced economies, the marginal effect from macro-prudential policy measures targeting financial institutions is negative, regardless of whether the new macro-prudential policy measures are implemented in the origin country or the destination country.
One of the conclusions is that banks not only appear to retreat from the more heavily regulated foreign markets but they also appear to retreat from foreign markets when more macro-prudential policy measures are implemented in the origin country. This could be an indication of little or no opportunities for regulatory arbitrage for banks in advanced economies. In contrast, for banks operating in the emerging and developing market economies, the effect from new macro-prudential policy measures in the origin or the destination country is positive. Banks are able to benefit from shifting lending to less regulated foreign markets. However, they are also able to make use of a funding advantage due to gaps in regulatory oversight in the destination country. Different opportunities for regulatory arbitrage could provide a logical explanation for the large and qualitative differences in marginal effects for the different country groups.
The results serve to illustrate the differences in policy responses across countries with different banking sectors, regulatory frameworks, and financial environments. The obvious policy implication from the results is that there are leakages and spillovers from macro-prudential policy that may not be as expected. This should be taken into account by policymakers, as the use of macro-prudential policy measures appears set to become even more prevalent. These results also call for further research into what drives the different spillover effects from macro-prudential policy measures in these different country groups. The role of macro-prudential policy in fending off the effects of a next big crisis may be instrumental. Thus, it is of utmost importance to have a fundamental understanding of the capabilities and limitations of the different macro-prudential policy measures as well as an understanding of the implications of the possible cross-border spillovers.
Related Link: Working Paper (PDF)
Keywords: International, Europe, Banking, Macro-Prudential Policy, Regulatory Arbitrage, Systemic Risk, Cross-Border Spillovers, Emerging Markets, ESRB
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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