International Banking and Cross-border Effects of Regulation: Lessons from Portugal

This paper offers a contribution to understand the cross-border effects of bank regulation using data on Portuguese banks. We find that the effect of foreign regulation on domestic credit growth depends on the type of regulation, on the channel of transmission as well as on the legal form of the bank. Our results show that a tightening in foreign regulation leads to a decrease in the growth of domestic credit in the case of concentration ratios and capital requirements and to the opposite effect in the case of sector specific capital buffers and reserve requirements in foreign currencies. We also find significant cross-border effects for the loan-to-value limits. In this case, cross-border spillovers work in different ways for domestic banks with international activity and for foreign banks: after a tightening in this instrument abroad domestic banks decrease credit growth in Portugal while foreign banks increase it. Finally, we show that the cross-border effects of capital requirements work differently through branches and subsidiaries.