International Banking and Cross-Border Effects of Regulation: Lessons from Chile

In this paper we address whether foreign regulations affect the domestic activity of a select group of internationally active banks in Chile, for the 2002q2-2013q4 sample period. We find that the spillover effects generated by changes in the prudential policy abroad have a positive, but relatively weak impact on domestic lending. When comparing the two dimensions of prudential regulations, i.e. inward transmission through international exposure of domestic banks and through affiliates of foreign-owned banks, the spillovers transmitted through the first approach are stronger and economically more significant than through the foreign subsidiary relationship. This result is robust to different specifications, and might suggest that foreign subsidiaries in Chile behave just like domestic banks, as they have to comply with the local regulation in the same way as local banks. Above all, capital requirements appear to be the most significant prudential policy affecting domestic lending.