The Spillovers, Interactions, and (Un)Intended Consequences of Monetary and Regulatory Policies

50 Pages Posted: 8 Feb 2016  

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Bank of England - Monetary Policy Committee

Dennis Reinhardt

Bank of England

Tomasz Wieladek

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2016

Abstract

Have bank regulatory policies and unconventional monetary policies — and any possible interactions — been a factor behind the recent “deglobalisation” in cross-border bank lending? To test this hypothesis, we use bank-level data from the UK — a country at the heart of the global financial system. Our results suggest that increases in microprudential capital requirements tend to reduce international bank lending and some forms of unconventional monetary policy can amplify this effect. Specifically, the UK’s Funding for Lending Scheme (FLS) significantly amplified the effects of increased capital requirements on external lending. QE may also have had an amplification effect, but these estimates are usually insignificant and smaller in magnitude. We find that this interaction between microprudential regulations and the FLS can explain roughly 30% of the contraction in aggregate UK cross-border bank lending between mid-2012 and end-2013, corresponding to around 10% of the contraction globally. This suggests that unconventional monetary policy designed to support domestic lending can have the unintended consequence of reducing foreign lending.

Keywords: Capital requirements, Funding for Lending Scheme, financial deglobalisation

JEL Classification: G21, G28

Suggested Citation

Forbes, Kristin J. and Reinhardt, Dennis and Wieladek, Tomasz, The Spillovers, Interactions, and (Un)Intended Consequences of Monetary and Regulatory Policies (February 1, 2016). MIT Sloan Research Paper No. 5163-16. Available at SSRN: https://ssrn.com/abstract=2728405 or http://dx.doi.org/10.2139/ssrn.2728405

Kristin J. Forbes (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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HOME PAGE: http://web.mit.edu/kjforbes/www

National Bureau of Economic Research (NBER)

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Bank of England - Monetary Policy Committee ( email )

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Dennis Reinhardt

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Tomasz Wieladek

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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