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

Franch, Fabio; Nocciola, Luca; Żochowski, Dawid

doi:10.1016/j.jfs.2020.100820

Cited by 10 publications

(3 citation statements)

References 18 publications

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“…The coefficients of capital‐aimed macroprudential policies are both significant and positive, indicating that this type of macroprudential policy per se is ineffective in lowering banks' risk. This supports the findings of Laeven and Levine (2009) and Franch et al (2021) and the theory that managers will adapt to a tighter macroprudential framework by shifting banks' investments toward riskier assets, thereby increasing banks' risk.…”

Section: Resultssupporting

confidence: 87%

The contribution of macroprudential policies to banks' resilience: Lessons from the systemic crises and the COVID‐19 pandemic shock

2023

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This study examines the effectiveness of macroprudential policies in reducing the banks' risk during the COVID‐19 pandemic and compares these results with the systemic banking crises years. Based on a sample of 624 banks across 40 countries during the period 2006–2020, we find that loosening capital‐aimed macroprudential policies effectively reduced banks' risk during the COVID‐19 pandemic, while this behavior led to increased risk during the systemic crises years. In contrast, tightening the remaining macroprudential policies during the systemic crises years and during the pandemic proved effective in reducing banks' risk. Furthermore, we show that the magnitude of the impact of macroprudential policies was stronger during the systemic crisis than that during the pandemic. Finally, we show that the results are driven by the capital requirement prudential policy, both during the systemic crisis and the COVID‐19 pandemic, although the conservation buffer and the leverage limit also contributes to the ineffectiveness of these policies during the COVID‐19 pandemic. The banks' leverage and loan growth also play an enhancing role of the effects of the macroprudential policies.

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Section: Resultssupporting

confidence: 87%

The contribution of macroprudential policies to banks' resilience: Lessons from the systemic crises and the COVID‐19 pandemic shock

2023

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“…21 An important subset of the literature has also explored unintended consequences of bank capital regulation as well as interactions with other forms of banking regulation, particularly liquidity requirements (Boissay and Collard, 2016;Faia, 2019;De Nicolo et al, 2014) and monetary policy (Gambacorta and Murcia, 2019;De Jonghe et al, 2019;Eickmeier et al, 2018;Meeks, 2017;Takats and Temesvary, 2019;Uluc and Wieladek, 2018). Other considerations are effects on banking competition (Corbae and D'Erasmo, 2019), liquidity in repo and other financial markets (Van Horen and Kotidis, 2018;Boissay et al, 2018;Haselmann et al, 2019;Cenedese et al, 2019), cross-border spillovers (Franch et al, 2019;Takats and Temesvary, 2019), risk-taking (Martynova et al, 2019) and portfolio rebalancing away from risky (but potentially productive) lending towards safer assets (bonds or household mortgages) (Cohen and Scatigna, 2016;Ambrocio and Jokivuolle, 2017;Juelsrud and Wold, 2018;Gropp et al, 2019;Mayordomo and Rodriguez-Moreno, 2018), the non-price terms of credit contracts (Mayordomo et al, 2019), and shift in intermediation towards shadow banks (Irani et al, 2018). Gehrig and Iannino (2018) find evidence which suggests that the introduction of internal credit risk models in regulation may have led to increased exposures to systemic risk.…”

Section: Effects Of Capital Requirementsmentioning

confidence: 99%

Are Bank Capital Requirements Optimally Set? Evidence from Researchers’ Views

et al. 2020

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“…abroad, showing that tighter restrictions on bank activities in home jurisdictions are associated with greater risk-taking by banks abroad in the form of lower lending standards. According to the findings in Franch et al (2019), domestic banks reduce lending after a tightening of capital requirements in other countries, while foreign subsidiaries increase lending following the tightening of sector-specific capital buffers in the country of the parent bank.…”

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confidence: 99%

The Global Dimensions of Macroprudential Policy

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Conducting macroprudential policy in an open economy subject to global systemic risk 4.1 The global financial cycle and the effectiveness of domestic macroprudential policies 4.2 Cross-border spillovers of policies and international policy coordination 4.3 Using capital flow management measures for financial stability purposes 5 Concluding remarks References Annex 1: Summary of related research projects "Retrenchment of euro area banks and international banking models" (Argimón et al. (2019)) "An assessment of the global impact of European LTV/DSTI caps" (Buesa and Población (2019)) Contents Reports of the Advisory Scientific Committee No 10 / February 2020 Contents "More trade, more portfolio investment? Evidence at the country-industry level" (Della Corte (2019)) Two tales of foreign investor outflows: Italy in 2011-12 and 2018" (Della Corte and Federico (2019)) "Capital flows and the stabilizing role of macroprudential policies in CESEE" (Eller et al. (2019)) "The global capital flows cycle: structural drivers and transmission channels" (Habib and Venditti (2019)) "Financial cycles: Characterisation and real-time measurement" (Schüler et al. (2019)) Annex 2: Methodology and data used to analyse the transmission of global risk and the role of macroprudential policy Imprint and acknowlegements Reports of the Advisory Scientific Committee No 10 / February 2020 Executive summary 3This report elucidates the risk channels for EU economies associated with international financial integration and provides an overview of the macroprudential policy options that are available to address these risks.1 It builds on the main insights from the rich academic literature developed recently to create a narrative of the role of global variables for the conduct of macroprudential policy at a national level. The report reviews the evidence on the cross-border spillovers of domestic macroprudential policies (MPPs). It also highlights key policy areas for making macroprudential policy as effective as possible. Annex 1 presents findings from several new research papers across the European System of Central Banks.Global financial integration has increased substantially over the past three decades. This has made global variables more important for domestic economic and financial conditions. For example, global financial intermediaries may contribute to the build-up of systemic risk within domestic financial systems. Large and volatile capital flows may be associated with excessive foreign borrowing, credit booms and sometimes busts. EU economies are not an exception, with domestic financial conditions having strong interconnections with the rest of the world.Recent research has established that there is a global financial cycle in capital flows, asset prices and credit that influences domestic financial cycles. Domestic economies are increasingly vulnerable to external shocks: changes in global risk aversion or financing conditions in the core economies (the United States but also China, Japan, the United Kingdom and the euro area) or th...

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

Cited by 10 publications

References 18 publications

The contribution of macroprudential policies to banks' resilience: Lessons from the systemic crises and the COVID‐19 pandemic shock

The contribution of macroprudential policies to banks' resilience: Lessons from the systemic crises and the COVID‐19 pandemic shock

Are Bank Capital Requirements Optimally Set? Evidence from Researchers’ Views

The Global Dimensions of Macroprudential Policy

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