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

60 Pages Posted: 7 Jun 2016 Last revised: 17 Jun 2016

See all articles by Kristin J. Forbes

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Dennis Reinhardt

Bank of England

Tomasz Wieladek

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: June 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 cross-border lending. Quantitative easing did not appear to have a similar effect. 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 global contraction in cross-border lending. This suggests that unconventional monetary policy designed to support domestic lending can have the unintended consequence of reducing foreign lending.

Suggested Citation

Forbes, Kristin J. and Reinhardt, Dennis and Wieladek, Tomasz, The Spillovers, Interactions, and (Un)Intended Consequences of Monetary and Regulatory Policies (June 2016). NBER Working Paper No. w22307. Available at SSRN: https://ssrn.com/abstract=2790704

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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Dennis Reinhardt

Bank of England ( email )

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London, EC2R 8AH
United Kingdom

Tomasz Wieladek

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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