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Home sweet host: Prudential and monetary policy spillovers through global banks

Author

Listed:
  • Stefan Avdjiev
  • Bryan Hardy
  • Patrick McGuire
  • Goetz von Peter

Abstract

Prudential regulation of banks is multi-layered: policy changes by home-country authorities affect banks' global operations across many jurisdictions; changes by host-country authorities shape banks' operations in the host jurisdiction regardless of the nationality of the parent bank. Which layer matters most? Do these policies create cross-border spillovers? And how does monetary policy alter these spillovers? This paper examines the effect that changes in home- and hostcountry prudential measures have on cross-border credit, and how these interact with monetary policy. We use a novel approach to decompose growth in cross-border bank lending into separate home, host and common components, and then match each with the home or host policies that affect this component. Our results suggest that prudential policies can have spillover effects, which depend on the instrument used and on whether a bank's home or host country implemented them. Home policies tend to have larger spillovers on cross-border US dollar lending than host policies, primarily through substitution effects. We also find that a tightening of US monetary policy can compound the spillovers of certain prudential measures.

Suggested Citation

  • Stefan Avdjiev & Bryan Hardy & Patrick McGuire & Goetz von Peter, 2020. "Home sweet host: Prudential and monetary policy spillovers through global banks," BIS Working Papers 853, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:853
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    References listed on IDEAS

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    1. Patrick McGuire & Goetz von Peter, 2016. "The resilience of banks' international operations," BIS Quarterly Review, Bank for International Settlements, March.
    2. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2001. "The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries," Journal of International Economics, Elsevier, vol. 55(2), pages 263-294, December.
    3. Avdjiev, Stefan & Koch, Cathérine & McGuire, Patrick & von Peter, Goetz, 2018. "Transmission of monetary policy through global banks: Whose policy matters?," Journal of International Money and Finance, Elsevier, vol. 89(C), pages 67-82.
    4. McCauley, Robert N. & Bénétrix, Agustín S. & McGuire, Patrick M. & von Peter, Goetz, 2019. "Financial deglobalisation in banking?," Journal of International Money and Finance, Elsevier, vol. 94(C), pages 116-131.
    5. Hyun Song Shin, 2017. "Breaking free of the triple coincidence in international finance," IFC Bulletins chapters, in: Bank for International Settlements (ed.),Statistical implications of the new financial landscape, volume 43, Bank for International Settlements.
    6. Frederic Boissay & Carlos Cantú & Stijn Claessens & Alan Villegas, 2019. "Impact of financial regulations: insights from an online repository of studies," BIS Quarterly Review, Bank for International Settlements, March.
    7. Mary Amiti & David E. Weinstein, 2018. "How Much Do Idiosyncratic Bank Shocks Affect Investment? Evidence from Matched Bank-Firm Loan Data," Journal of Political Economy, University of Chicago Press, vol. 126(2), pages 525-587.
    8. Mark Gertler & Peter Karadi, 2015. "Monetary Policy Surprises, Credit Costs, and Economic Activity," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 44-76, January.
    9. Stefan Avdjiev & Cathérine Koch & Patrick McGuire & Goetz von Peter, 2017. "International Prudential Policy Spillovers: A Global Perspective," International Journal of Central Banking, International Journal of Central Banking, vol. 13(2), pages 5-33, March.
    10. Eugenio Cerutti & Ricardo Correa & Elisabetta Fiorentino & Esther Segalla, 2017. "Changes in Prudential Policy Instruments - A New Cross-Country Database," International Journal of Central Banking, International Journal of Central Banking, vol. 13(2), pages 477-503, March.
    11. Mary Amiti & Patrick McGuire & David E. Weinstein, 2019. "International Bank Flows and the Global Financial Cycle," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(1), pages 61-108, March.
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    Citations

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    Cited by:

    1. Bussière, Matthieu & Cao, Jin & de Haan, Jakob & Hills, Robert & Lloyd, Simon & Meunier, Baptiste & Pedrono, Justine & Reinhardt, Dennis & Shina, Sonalika & Sowerbutts, Rhiannon & Styrin, Konstantin, 2020. "The interaction between macroprudential policy and monetary policy: overview," Bank of England working papers 886, Bank of England.
    2. Iñaki Aldasoro & Paula Beltrán & Federico Grinberg & Tommaso Mancini-Griffoli, 2020. "The macro-financial effects of international bank lending on emerging markets," BIS Working Papers 899, Bank for International Settlements.
    3. Financial Stability Committee, Task Force on cross-border Spillover Effects of macroprudential measures & Kok, Christoffer & Reinhardt, Dennis, 2020. "Cross-border spillover effects of macroprudential policies: a conceptual framework," Occasional Paper Series 242, European Central Bank.

    More about this item

    Keywords

    international banking; prudential policy; international policy coordination and transmission; currencies; international spillovers;

    JEL classification:

    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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