International Banking and Cross-Border Effects of Regulation: Lessons from the United States

Abstract

2 countries. Our methodology largely follows that described in Buch and Goldberg (2016) and is part of the joint research effort of the IBRN on cross-border prudential policy spillovers. 2 Our first specifications test whether U.S. global banks and U.S. branches and subsidiaries of foreign banks adjust their lending in response to foreign prudential instrument changes. We find statistically significant effects for 3 instruments: capital requirements, local currency reserve requirements, and limits on loan-to-value (LTV) ratios. The tightening of prudential instruments abroad increases loan growth in the United States. Higher foreign country capital requirements abroad mainly affect U.S. loan growth through U.S. global banks, while higher local currency reserve requirements and limits on LTV ratios mainly transmit through the lending of the U.S. branches and subsidiaries of foreign banks. Our second set of tests investigates whether U.S. global banks' exposures in foreign countries react to prudential instrument changes there. The evidence is weaker in this case. Foreign changes in prudential instruments have a weak and mostly insignificant effect on U.S. banks' claims on residents in the country where the change occurs. Lastly, we explore whether changes in U.S. prudential instruments have effects across borders. While foreign economies have used a combination of both cyclical and structural instruments, U.S. policymakers have favored structural regulations that are less correlated with the financial cycle and are not changed frequently (Elliott, Feldberg, and Lehnert, 2013). As a result, the only U.S. instrument change recorded in the IBRN Prudential Instruments Database is related to the introduction of the Basel 2.5 capital regulations in 2013q1. Our results indicate that after this change the largest U.S. banks, those that are required to participate on annual stress tests or follow the Advanced Approaches capital framework, reduced their foreign lending growth relative to the smaller banks. 3 2 The following studies are part of the IBRN study on the impact of prudential instrument changes on the activities of global banks:

Can Macroprudential Measures Make Cross-Border Lending More Resilient? Lessons from the Taper Tantrum

“…In a similar vein, Houston et al (2012), for instance, find that regulations can affect international banks' activities. Even closer to our focus, Berrospide et al (2017) and Temesvary (2017) find evidence of regulatory spillovers into bilateral bank flows to and from the U.S. In addition, Ocampo (2011) studies counter-cyclical regulations in developing countries, and Laeven et al (2014) examine the importance of bank rules which address systemic risk.…”

“…Global Macro Prudential Instruments (GMPI) survey (Cerrutti et al, 2015;Correa et al, 2016;Avdjiev et al, 2017;Berrospide et al, 2017). Table 1 and Table A1 summarize and describe these indices.…”

Global Financial Development Report 2019/2020: Bank Regulation and Supervision a Decade after the Global Financial Crisis

“…Although Basel III was mainly adopted in high-income countries, it has implications for lending in developing countries as banks adjust their assets and cross-border operations. For example, Berrospide et al (2017) find that tighter U.S. capital regulation reduced lending by large U.S. global banks in other countries. At the same time, high capital requirements seem to change to whom banks lend in other countries.…”

US Political Shocks, Global Banks, and International Financial Markets: Evidence from the 2016 Presidential Election

“…A shock to a global lender is thus transmitted to borrower countries. Among different types of shocks, regulatory measures such as changes in bank capital requirements have cross-border liquidity effects, with regulatory reform in international financial centers ultimately spilling over into borrower countries (Berrospide et al, 2017;Kalemli-Ozcan, Papaioannou and Perri, 2013;Aiyar et al, 2014). In sum, regulatory reforms that affect US global banks' ability to lend affect the supply of credit, and thus economic performance, around the world.…”