Regulatory Arbitrage in Action: Evidence from Banking Flows and Macroprudential Policy

37 Pages Posted: 15 Sep 2015

Date Written: September 11, 2015

Abstract

We use a new database on macroprudential policy actions to examine whether macroprudential regulations affect international banking flows. We find evidence that borrowing by the domestic non-bank sector from foreign banks increases after home authorities take a macroprudential capital action. We find no increase in borrowing from foreign banks after an action which tightens lending standards (such as limits on loan-to-value ratios for house purchase). Evidence on reserve requirements is mixed. Differences in the application of regulation for ending standards and capital regulation for international banks mean that while there is a level playing field for lending standards regulation, this does not always apply for capital regulation, giving foreign branches regulated by their home authorities a competitive advantage. Our results are, at first sight, different from the literature on regulatory arbitrage: we find that foreign banks expand their lending into host countries where regulation is tightened. But this does not occur when regulations apply also to them. The results have implications for macroprudential instrument choice and calibration, and for reciprocating regulation internationally.

Keywords: Macroprudential policies, cross-border banking flows, leakages.

JEL Classification: F32, F34, G21.

Suggested Citation

Reinhardt, Dennis and Sowerbutts, Rhiannon, Regulatory Arbitrage in Action: Evidence from Banking Flows and Macroprudential Policy (September 11, 2015). Bank of England Working Paper No. 546. Available at SSRN: https://ssrn.com/abstract=2660121 or http://dx.doi.org/10.2139/ssrn.2660121

Dennis Reinhardt (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Rhiannon Sowerbutts

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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