Cross-Border Banking and the Circumvention of Macroprudential and Capital Control Measures

47 Pages Posted: 15 Nov 2018

See all articles by Eugenio Cerutti

Eugenio Cerutti

International Monetary Fund (IMF); Johns Hopkins University

Haonan Zhou

Princeton University - Department of Economics

Date Written: September 2018

Abstract

We analyze the joint impact of macroprudential and capital control measures on cross-border banking flows, while controlling for multidimensional aspects in lender-and-borrower-relationships(e.g., distance, cultural proximity, microprudential regulations). We uncover interesting spillover effects from both types of measures when applied either by lender or borrowing countries, with many of them most likely associated with circumvention or arbitrage incentives. While lender countries' macroprudential policies reduce direct cross-border banking outflows, they are associated with larger outflows through local affiliates. Direct cross-border inflows are higher in borrower countries with more usage of macroprudential policies, and are linked to circumvention motives. In the case of capital controls, most spillovers seem to be present through local affiliates.We do not find evidence to support the idea that additional capital inflow controls could interact with macroprudential policies to mitigate cross-border spillovers.

Keywords: International financial markets, Capital controls, Cross-Border Banking Flows, Macroprudential Policies, International Policy Coordination and Transmission

JEL Classification: F42, G15, G21

Suggested Citation

Cerutti, Eugenio and Zhou, Haonan, Cross-Border Banking and the Circumvention of Macroprudential and Capital Control Measures (September 2018). IMF Working Paper No. 18/217, Available at SSRN: https://ssrn.com/abstract=3285217

Eugenio Cerutti (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

Johns Hopkins University ( email )

Baltimore, MD 21218
United States

Haonan Zhou

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

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