Can macroprudential measures make cross-border lending more resilient?

Summary

Focus

Regulators apply macroprudential measures to make the financial system more stable. These measures may also stabilize cross-border bank lending during times of stress. To test this theory, we examine how macroprudential measures stabilized cross-border bank lending during the "taper tantrum", after Federal Reserve (Fed) Chairman Ben Bernanke's signal in mid-2013 that the Fed would start scaling back asset purchases.

Contribution

Our paper is the first to analyse the stabilising impact of macroprudential tools during the "taper tantrum" episode, which sparked a U.S. dollar funding shock in international financial markets. Our study draws on a unique dataset, combining the Bank for International Settlements' International Banking Statistics with the International Banking Research Network's prudential regulatory database.

Findings

We find that macroprudential tools did stabilise cross-border bank lending growth. Borrowers' host countries that made more active use of these tools before the taper tantrum, received more stable lending. This was true for lending to both banks and non-banks. The stabilising effect was stronger in advanced economies than in emerging markets. Among the various tools, changing concentration limits to restrict banks' exposures to specific sectors, altering loan-to-value ratio caps, and changing local currency reserve requirements were very effective. Finally, our results suggest that policymakers may consider applying macroprudential tools to soften the impact of financial shocks. Macroprudential tools contribute to the stability of the domestic financial system and also encourage cross-border bank lending into the economy.

Abstract

We study the effect of macroprudential measures on cross-border lending during the taper tantrum, which a saw strong slowdown in cross-border bank lending to some jurisdictions. We use a novel dataset combining the BIS Stage 1 enhanced banking statistics on bilateral cross-border lending flows with the IBRN's macroprudential database. Our results suggest that macroprudential measures implemented in borrowers' host countries prior to the taper tantrum significantly reduced the negative effect of the tantrum on cross-border lending growth. The shock-mitigating effect of host country macroprudential rules are present both in lending to banks and non-banks, and are strongest for lending flows to borrowers in advanced economies and to the non-bank sector in general. Source (lending) banking system measures do not affect bilateral lending flows, nor do they enhance the effect of host country macroprudential measures. Our results imply that policymakers may consider applying macroprudential tools to mitigate international shock transmission through cross-border bank lending.

JEL classification: F34, F42, G21, G38

Keywords: taper tantrum, cross-border claims, macroprudential policy, diff-in-diff analysis