Working Paper: NBER ID: w22307
Authors: Kristin Forbes; Dennis Reinhardt; Tomasz Wieladek
Abstract: Have bank regulatory policies and unconventional monetary policies—and any possible interactions—been a factor behind the recent “deglobalisation” in cross-border bank lending? To test this hypothesis, we use bank-level data from the UK—a country at the heart of the global financial system. Our results suggest that increases in microprudential capital requirements tend to reduce international bank lending and some forms of unconventional monetary policy can amplify this effect. Specifically, the UK’s Funding for Lending Scheme (FLS) significantly amplified the effects of increased capital requirements on cross-border lending. Quantitative easing did not appear to have a similar effect. We find that this interaction between microprudential regulations and the FLS can explain roughly 30% of the contraction in aggregate UK cross-border bank lending between mid-2012 and end-2013, corresponding to around 10% of the global contraction in cross-border lending. This suggests that unconventional monetary policy designed to support domestic lending can have the unintended consequence of reducing foreign lending.
Keywords: monetary policy; regulatory policy; cross-border lending; capital requirements
JEL Codes: G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Unconventional monetary policy aimed at domestic lending (E52) | Reduction in foreign lending (F34) |
| Increases in microprudential capital requirements (G28) | Reductions in international bank lending (F65) |
| Increases in microprudential capital requirements + Funding for Lending Scheme (FLS) (G21) | Amplified reductions in international bank lending (F65) |
| Interaction between capital requirements and FLS (E44) | Contraction in aggregate UK cross-border bank lending (F65) |