How does the interaction of macroprudential and monetary policies affect cross-border bank lending?

Takats, Elod; Temesvary, Judit

doi:10.17016/FEDS.2019.045

Working Paper

How does the interaction of macroprudential and monetary policies affect cross-border bank lending?

Abstract: We combine a rarely accessed BIS database on bilateral cross-border lending flows with cross-country data on macroprudential regulations. We study the interaction between the monetary policy of major international currency issuers (USD, EUR and JPY) and macroprudential policies enacted in source (home) lending banking systems. We find significant interactions. Tighter macroprudential policy in a home country mitigates the impact on lending of monetary policy of a currency issuer. For instance, macroprudential tightening in the UK mitigates the negative impact of US monetary tightening on USD-denominated cross-border bank lending outflows from UK banks. Vice-versa, easier macroprudential policy amplifies impacts. The results are economically significant.

Keywords: Cross-Border Claims; Diff-In-Diff Analysis; Macroprudential Policy; Monetary Policy;

JEL Classification: F34; F42; G38; G21;

https://doi.org/10.17016/FEDS.2019.045