Home sweet host: A cross‐country perspective on prudential and monetary policy spillovers through global banks

Published date01 February 2021
Date01 February 2021
DOIhttp://doi.org/10.1111/roie.12504
20
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wileyonlinelibrary.com/journal/roie Rev Int Econ. 2021;29:20–36.
© 2020 John Wiley & Sons Ltd
Received: 30 November 2019
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Revised: 15 July 2020
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Accepted: 4 September 2020
DOI: 10.1111/roie.12504
SPECIAL ISSUE PAPER
Home sweet host: A cross-country perspective on
prudential and monetary policy spillovers through
global banks
StefanAvdjiev
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BryanHardy
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PatrickMcGuire
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Goetzvon Peter
Monetary and Economic Department,
Bank for International Settlements, Basel,
Switzerland
Correspondence
Bryan Hardy, Monetary and Economic
Department, Bank for International
Settlements, Centralbahnplatz 2, 4002
Basel, Switzerland.
Email: Bryan.Hardy@bis.org
Abstract
Prudential regulation of banks is multi-layered: policy
changes by home-country authorities affect banks’ global
operations across many jurisdictions; policy changes by
host-country authorities shape banks’ operations in the host
jurisdiction regardless of the nationality of the parent bank.
Do these policies create (unintended) cross-border spillo-
vers? Similarly, monetary policy actions by major central
banks may also have effects on the behaviour of banks in
other countries. This paper examines the effect that changes
in home- and host-country prudential measures have on
cross-border dollar credit provision, and how these inter-
act with US monetary policy. We first run panel regres-
sions with both layers of regulation, to examine which has a
greater effect on cross-border lending. We then use a novel
approach to decompose growth in cross-border bank lend-
ing into separate home, host and common components, and
then match each with the corresponding home or host poli-
cies. Our results suggest that prudential policies can have
spillover effects, which depend on the instrument used and
on whether a bank's home or host country implemented
them. Home policies tend to have larger spillovers on cross-
border US dollar lending than host policies. We also find
that a tightening of US monetary policy can compound the
spillovers of some prudential measures.
JEL CLASSIFICATION
F42; G21; L51
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21
AVDJIEV Et Al.
1
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INTRODUCTION
Global finance operates in a complex web of regulation enacted by regulators in different jurisdic-
tions. There is a long tradition of consolidated bank regulation by home regulators (i.e., where the
bank is headquartered), the key examples being the Basel regulatory frameworks I, II and III. But
countries also apply local regulation on a jurisdictional basis (i.e., the host-country where the bank
operates), e.g., liquidity standards, subsidiarisation and ring-fencing. While many papers study the
effects of financial regulation, few address the complex home-host overlay.1 Which layer—home or
host—matters more?
We focus on cross-border bank credit to study international spillovers of prudential policies and
their interaction with monetary policy. By “spillover” we mean that a policy affects credit to bor-
rowers abroad, whether or not that was intended. As with monetary policy, the intended scope of
prudential policy is usually the domestic market and the health of the banks operating there. When a
country tightens loan-to-value limits, for instance, the intent is to restrict domestic real-estate related
borrowing. This reasoning also applies to policies that aim to strengthen banks’ resilience, which may
induce banks to reduce leverage by raising capital or by shedding assets. Cross-border credit per se is
generally not the target of such policies (indeed, supervisors often prefer to see capital-raising instead
of asset-shedding).2 But cross-border credit can be affected, and thus act as a channel through which
spillovers occur. While a large literature studies the intended primary effect on credit and the econ-
omy, this paper studies the unintended spillovers affecting other borrowers abroad.
Our work is part of a broader initiative of the International Banking Research Network (IBRN)
to explore the interaction between monetary and prudential policies and their international spillovers
through banks. It is natural to focus on the role of banks: prudential policies are almost exclusively
imposed on banks,3 monetary policy is, to a large extent, transmitted through banks, and banks are a
primary conduit for international credit flows. Our paper complements the individual country studies
in the IBRN with a global perspective that explicitly analyses the home and host dimensions.
Our empirical setup exploits the home- and host-country dimensions available in our global data-
set on international banking. The advantage of this dataset is that policy changes can be observed for
many home and host countries simultaneously. To our knowledge, this is the first paper to analyse pru-
dential measures along both dimensions. Takáts and Temesvary (2019b) focus on lender (home) and
borrower countries; they do not cover host countries where banks operate; and they study macro-pru-
dential policies in a short sample restricted to 2012–2013. We employ a slice of the BIS international
banking statistics (IBS) that reveals both a bank's nationality (home country) and where it operates
(host country). Our base sample includes 41 bank nationalities with operations in 42 host countries
over the period 2000Q1-2017Q4.
We take two complementary approaches. First, we run a panel regression comprising both home-
and host-country regulation, to examine which layer has a greater effect on cross-border lending
(“horse race”). Since global banking is highly concentrated, we estimate the model by weighted least
squares to ensure that the results are relevant for aggregate cross-border lending.
In a second and novel approach, we first decompose the growth in credit into home-country,
host-country and common components, and then match each component with policies that affect it
(e.g., home prudential policies with the home-country component). The methodology follows Amiti
and Weinstein (2018). In our context, it isolates the variation specific to individual home countries
from that specific to particular host countries, while stripping out the common growth component.
US monetary policy and other global factors mostly affect the common component, leaving variation
across home and host countries to be explained by home or host regulation. This methodological con-
tribution of our paper helps in identifying the effects of overlapping home and host country policies.

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