22 April 2016

Bank of England: Cross-border regulatory spillovers: How much? How important? What sectors? Lessons from the United Kingdom

Authors examine whether UK-owned banks’ domestic lending is affected by prudential actions in other countries where they have exposures. They also examine the impact of a change in prudential policy in a foreign-owned UK-resident bank’s home jurisdiction on its lending to the United Kingdom.

This paper forms the United Kingdom’s contribution to the International Banking Research Network’s project examining the cross-border spillovers of prudential policy actions, where each participant in the network uses proprietary bank-level data available to central banks.

Author’s results suggest that most prudential actions taken abroad do not have a significant spillover effect on the UK. For total lending to all UK sectors, it is perhaps not surprising that prudential policy actions taken by a single foreign jurisdiction do not appear to affect the UK, given the UK’s role as a major international financial centre. 

Nevertheless, the aggregate results conceal some sectoral heterogeneity.  For example their results suggest that when a foreign authority takes a lending standards action, UK-resident affiliates owned in that jurisdiction expand PNFC and household lending in the UK.

This implies that focusing on aggregate variables may underestimate the spillovers of prudential policies and suggest a role for continued improvement of sectoral level data.  So far, research such as Lim et al (2011) and Kuttner and Shim (2013) tended to focus on aggregate variables such as total lending.  Their results suggest that investigating rebalancing at the domestic level may yield a deeper understanding of the transmission of prudential policies. 

Full working paper

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