ECB Working Paper: Cross-border effects of prudential regulation: evidence from the euro area

Authors:
Fabio Franch, Luca Nocciola, Dawid Żochowski

Date:
May 2019

Abstract:

We analyse the cross-border propagation of prudential regulation in the euro area. Using the Prudential Instruments Database (Cerutti et al., 2017b) and a unique confidential database on balance sheets items of euro-area financial institutions we estimate panel models for 248 banks from 16 euro-area countries. We find that domestic banks reduce lending after the tightening of capital requirements in other  countries, while they increase lending when loan-to-value (LTV) limits  or reserve requirements are tightened abroad. We also find that foreign affiliates increase lending following the tightening of sector-specific capital buffers in the countries where their parent banks  reside and that bank size and liquidity play a role in determining the magnitude of cross-border spillovers.

Link: Cross-border effects of prudential regulation: evidence from the euro area