The Spillovers, Interactions, and (Un)Intended Consequences of Monetary and Regulatory Policies
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.
We would like to thank James Benford, Enrica Detragiache, Marco Lo Duca, Jas Ellis, Phil Evans, Linda Goldberg, Glenn Hoggarth, Sujit Kapadia, Luc Laeven, Lyndon Nelson, Roland Straub, and participants at the Carnegie-Rochester-NYU Conference on Public Policy, CBRT-IMF-BIS conference on ‘Macroprudential Policy: Effectiveness and Implementation Challenges’, at the EMG-ECB Workshop on Global Liquidity and its International Implications, the ECB workshop on non-standard monetary policy measures, the IMF’s 16th Jacques-Polak Annual Research Conference, the Bank of England Research Steering committee and Research Awayday for useful comments. We thank John Lowes for excellent assistance and advice with regard to the data. This paper was initially released as Bank of England External MPC Unit Discussion Paper No. 44. All remaining errors are our own. The views expressed in this paper are those of the authors, and not any institutions with which they are affiliated. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Wieladek received funding as an ECB Lamfalussy fellow, for a completely independent paper on the impact of capital requirements on the mortgage market, while he also worked on this project.
Forbes, Kristin & Reinhardt, Dennis & Wieladek, Tomasz, 2017. "The spillovers, interactions, and (un)intended consequences of monetary and regulatory policies," Journal of Monetary Economics, Elsevier, vol. 85(C), pages 1-22. citation courtesy of