Macroprudential Policy Spillovers in International Banking Groups. Beggar-Thy-Neighbour and the Role of Internal Capital Markets

44 Pages Posted: 10 Aug 2022

See all articles by Aurea Ponte Marques

Aurea Ponte Marques

European Central Bank (ECB)

Giuseppe Cappelletti

European Central Bank (ECB)

Carmelo Salleo

European Central Bank (ECB)

Diego Vila Martín

European Central Bank (ECB)

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Abstract

Beggar-thy-neighbour in macroprudential policy? To answer this question, we study the impact of macroprudential capital buffers on banking groups’ lending and risk-taking decisions. This paper also presents the first evidence on whether banking groups respond to changes in capital buffers by adjusting their internal capital markets. Our confidential dataset includes a large set of banking groups operating in the euro area and abroad, which are subject to additional capital buffers (OSII buffers). The assignment of higher capital buffers is based on a scoring system which is exploited for identification in the context of a fuzzy regression discontinuity and a difference-in-differences matching designs. Results indicate that, on average, when parent banks are constrained with an average higher capital buffer of 0.5 percent, subsidiaries reduce their lending by around 0.48 percentage points and decrease their risk-taking by around 1.3 percentage points. This effect is more prominent for non-financial corporations. This change in behaviour is accompanied by negative effects on profitability. Furthermore, banking groups allocate capital at the consolidated (parent) level by deleveraging their holdings of debt (around 6 percentage points) and equity (around 7 percentage points) issued by their subsidiaries. Our results confirm that higher capital buffers have a positive disciplinary effect by reducing banks’ risk-taking while having a (temporary) adverse impact through a decrease in lending and a deleverage on local bank credit and capital markets.

Keywords: macroprudential policy, Spillovers, International banking, lending, Risk-Taking, Internal capital markets

Suggested Citation

Ponte Marques, Aurea and Cappelletti, Giuseppe and Salleo, Carmelo and Martín, Diego Vila, Macroprudential Policy Spillovers in International Banking Groups. Beggar-Thy-Neighbour and the Role of Internal Capital Markets. Available at SSRN: https://ssrn.com/abstract=4186490 or http://dx.doi.org/10.2139/ssrn.4186490

Aurea Ponte Marques (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Giuseppe Cappelletti

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

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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