Can Macroprudential Measures Make Cross-Border Lending More Resilient? Lessons from the Taper Tantrum

Abstract

We study the effect of macroprudential measures on cross-border lending during the taper tantrum, which saw a strong slowdown of cross-border bank lending to some jurisdictions. We use a novel dataset combining the BIS Stage 1 enhanced banking statistics on bilateral cross-border lending flows with the IBRN’s macroprudential database. Our results suggest that macroprudential measures implemented in borrowers’ host countries prior to the taper tantrum significantly reduced the negative effect of the tantrum on cross-border lending growth. The shock-mitigating effect of host country macroprudential rules are present both in lending to banks and non-banks, and are strongest for lending flows to borrowers in advanced economies and to the non-bank sector in general. Source (lending) banking system measures do not affect bilateral lending flows, nor do they enhance the effect of host country macroprudential measures. Our results imply that policymakers may consider applying macroprudential tools to mitigate international shock transmission through cross-border bank lending.

Cross-border effects of prudential regulation: Evidence from the euro area

“…In a cross-country study using country level data from the BIS international banking statistics, Avdjiev et al (2017) find, in line with our results for individual banks, that better capitalised banking systems reinforce international spillovers from prudential instruments. Takáts and Temesvary (2017) use also the IBRN data in a cross-country study to analyse the effect of macroprudential measures on cross-border lending during the taper tantrum. They find that macroprudential measures implemented in borrowers' host countries prior to the taper tantrum significantly reduced the negative effect of the tantrum on cross-border lending growth.…”

In the Face of Spillovers: Prudential Policies in Emerging Economies

“…11 Moreover, the adoption of Basel III was broadly anticipated, more so than for other policy instruments. Takats and Temesvary (2019a) also argue that these general capital requirements are microprudential in nature, such that the remaining instruments in the proxy more closely match macroprudential measures. 12 Our aggregate prudential policy measure includes reserve requirements, including those levied on both domestic and foreign currency-denominated deposits.…”

“…10 Second, we construct measures of aggregate prudential policy, by summing cumulated measures of different instruments. Our baseline measure of aggregate prudential policy actions in-cludes all prudential policy instruments in the Cerutti et al (2017b) dataset, with the exception of general capital requirements in line with Takats and Temesvary (2019a). We exclude general capital requirements from our baseline measure because they largely reflect the adoption of the Basel III regime, an internationally harmonised move resulting in limited cross-country variation in the specific series.…”

“…Our work primarily contributes to a comparatively limited literature studying cross-border interactions of monetary and prudential policies. Using BIS data on bilateral cross-border lending flows, Takats and Temesvary (2019a) find that macroprudential measures applied in emerging market economies prior to the 2013 'Taper Tantrum'-linked to US monetary policydirectly stabilised domestic financial systems and make cross-border bank lending flows less volatile. Concurrent work by Hills, Lloyd, Reinhardt, and Sowerbutts (2019) and Takats and Temesvary (2019b) studies the interaction of monetary and macroprudential policies via crossborder bank lending.…”

Le Pont de Londres: Interactions between monetary and prudential policies in cross‐border lending

“…Some papers focus on specific prudential policy instruments or countries (e.g., Bruno & Shin, 2014; De Jonghe et al., 2020; de Marco & Wieladek, 2016; Forbes et al., 2017), while more systematic global analyses have a different scope to ours. For instance, Bremus and Fratszcher (2015) focus on syndicated loans, Takats and Temesvary (2019) only assess prudential policy interactions in response to the 2013 taper tantrum, and Coman and Lloyd (2019) assess how macro‐financial outcomes in emerging markets can be insulated against US monetary spillovers by domestic prudential policies.…”