Cross-Border Effects of Prudential Regulation: Evidence from the Euro Area
30 Pages Posted: 24 May 2019
Date Written: May 23, 2019
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: Suggested Citation