How Do Banking Groups React to Macroprudential Policies? Cross-Border Spillover Effects of Higher Capital Buffers on Lending, Risk-Taking and Internal Markets

52 Pages Posted: 1 Dec 2020 Last revised: 18 Nov 2021

See all articles by Giuseppe Cappelletti

Giuseppe Cappelletti

European Central Bank (ECB)

Aurea Ponte Marques

European Central Bank (ECB)

Carmelo Salleo

European Central Bank (ECB)

Diego Vila Martín

affiliation not provided to SSRN

Date Written: November, 2020

Abstract

We study the impact of macroprudential capital buffers on banking groups' lending and risk-taking decisions, also investigating implications for internal capital markets. For identification, we exploit heterogeneity in buffers applied to other systemically important institutions, using information from three unique confidential datasets, including information on the EBA scoring process. This policy design induces a randomized experiment in the neighborhood of the threshold, which we use to identify the effect of higher capital requirements by comparing the change in the outcome for banks just above and below the cut-off, before and after the introduction of the buffer. The analysis is implemented relying on a fuzzy regression discontinuity and on a difference-in-differences matching design. We find that, when parent banks are constrained with higher buffers, subsidiaries deleverage lending and risk-taking towards non-financial corporations and marginally expanded lending towards households, with negative effects on profitability. Also, we find that parents cut down on holdings of debt and equity issued by their subsidiaries. Our findings support the hypothesis that higher capital buffers have a positive disciplinary effect by reducing banks' risk-taking while having a (temporary) adverse impact on the real economy through a decrease in affiliated banks' lending activity. Therefore, to ensure the effectiveness of macroprudential policy, it is essential that policymakers assess their potential cross-border effects.

Keywords: capital buffers, Internal capital markets, lending, macroprudential policy, risk-taking

JEL Classification: E44, E51, E58, G21, G28

Suggested Citation

Cappelletti, Giuseppe and Ponte Marques, Aurea and Salleo, Carmelo and Martín, Diego Vila, How Do Banking Groups React to Macroprudential Policies? Cross-Border Spillover Effects of Higher Capital Buffers on Lending, Risk-Taking and Internal Markets (November, 2020). ECB Working Paper No. 20202497, Available at SSRN: https://ssrn.com/abstract=3739838 or http://dx.doi.org/10.2139/ssrn.3739838

Giuseppe Cappelletti (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Aurea Ponte Marques

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Carmelo Salleo

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Diego Vila Martín

affiliation not provided to SSRN

No Address Available

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