Cross-Border Effects of Prudential Regulation: Evidence from the Euro Area

30 Pages Posted: 24 May 2019

See all articles by Fabio Franch

Fabio Franch

Reserve Bank of Australia

Luca Nocciola

European Central Bank (ECB)

Dawid Żochowski

European Central Bank

Date Written: May 23, 2019

Abstract

We analyse the cross-border propagation of prudential regulation in the euro area. Using the Prudential Instruments Database (Cerutti et al., 2017b) and a unique confidential database on balance sheets items of euro-area financial institutions we estimate panel models for 248 banks from 16 euro-area countries. We find that domestic banks reduce lending after the tightening of capital requirements in other countries, while they increase lending when loan-to-value (LTV) limits or reserve requirements are tightened abroad. We also find that foreign affiliates increase lending following the tightening of sector-specific capital buffers in the countries where their parent banks reside and that bank size and liquidity play a role in determining the magnitude of cross-border spillovers.

Keywords: prudential policy, cross-border spillovers, international banking

JEL Classification: G21, F34, F36

Suggested Citation

Franch, Fabio and Nocciola, Luca and Żochowski, Dawid, Cross-Border Effects of Prudential Regulation: Evidence from the Euro Area (May 23, 2019). ECB Working Paper No. 2285 (2019); ISBN 978-92-899-3547-0 . Available at SSRN: https://ssrn.com/abstract=3393348

Fabio Franch

Reserve Bank of Australia ( email )

65, Martin Place
Sydney, NSW 2000
Australia

Luca Nocciola

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Dawid Żochowski (Contact Author)

European Central Bank ( email )

Sonnemannstrasse 20
Frankfurt am Main, 60314
Germany

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