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The Cross Border Effects of Bank Capital Regulation in General Equilibrium

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  • Maximiliano San Millán

Abstract

We examine the cross-border effects of bank capital requirements using a two-country DSGE model with financial frictions, calibrated to match Euro Area banking flows. Regulation follows a host country principle, applying uniformly to all bank exposures within a country, regardless of the banks' nationality. We find that increasing capital requirements in one country leads to a short run credit contraction in interconnected countries. However, long run credit spillovers are negligible. Instead, we find positive long run welfare spillovers, primarily due to higher bank dividend payouts to foreign bank owners, rather than increased financial stability in the foreign country.

Suggested Citation

  • Maximiliano San Millán, 2025. "The Cross Border Effects of Bank Capital Regulation in General Equilibrium," Working Papers Central Bank of Chile 1046, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:1046
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