Global Banking and Macroprudential Policy: New Evidence on U.S. Banks

Cross‐border regulatory arbitrage by global banks remains the main challenge to the effectiveness of macroprudential policy. This article aims to improve the understanding of the extent to which macroprudential initiatives around the world have shaped global banking, focusing on U.S. banks. An ad hoc dataset on the geographical distribution of on and off balance sheet activities of foreign branches allows the investigation of whether regulatory arbitrage has stimulated international leakages of macroprudential regulation. I first focus my attention on the lending behavior in those host countries in which foreign branches are left out of the regulatory perimeter via the institution‐targeted tools implementation. I then investigate whether macroprudential policy leakages due to regulatory arbitrage occur via off‐balance sheet activities. My findings suggest that institution‐targeted macroprudential regulation in host countries increases branches’ local lending, especially when U.S. banks are also exempted from the corresponding tool at home. I further find evidence in support of the fact that stricter local macroprudential policy has increased off‐balance sheet activities of resident foreign branches, as far as interest rate swaps exposures are concerned. From a normative standpoint, my results highlight the importance of reciprocity and international cooperation among macroprudential regulators