Working Paper: CEPR ID: DP10296
Authors: Franziska Bremus; Marcel Fratzscher
Abstract: The paper analyzes the effects of changes to regulatory policy and to monetary policy on cross-border bank lending since the global financial crisis. Cross-border bank lending has decreased, and the home bias in the credit portfolio of banks has risen sharply, especially among banks in the euro area. Our results suggest that expansionary monetary policy in the source countries ? as measured by the change in reserves held at central banks - has encouraged cross-border lending, both in euro area and non-euro area countries. Regarding regulatory policy, increases in financial supervisory power or independence of the supervisory authorities have encouraged credit outflows from source countries. The findings thus underline the importance of regulatory arbitrage as a driver of cross-border bank flows since the global financial crisis. However, in the euro area, arbitrage in capital stringency was linked to lower cross-border lending since the crisis.
Keywords: arbitrage; cross-border bank lending; financial integration; home bias; monetary policy; regulation
JEL Codes: F30; G11; G15; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expansionary monetary policy in source countries (E52) | higher cross-border bank lending (F65) |
| greater independence and power of financial regulators in source countries (G18) | increased credit outflows (F65) |
| greater independence and power of financial regulators in source countries (G18) | decrease in cross-border lending in euro area recipient countries (F65) |
| tighter capital stringency in source country (F32) | discouragement of cross-border lending (F65) |
| tighter regulations (G18) | stronger home bias in banking portfolios (F65) |
| tighter regulations (G18) | less cross-border lending (F65) |