Monday , August 26 2019
Home / Bank of International Settlement / How does the interaction of macroprudential and monetary policies affect cross-border bank lending?

How does the interaction of macroprudential and monetary policies affect cross-border bank lending?

Summary:
BIS Working Papers  |  No 782  |  15 May 2019 by  Előd Takáts and Judit Temesvary PDF full text (666kb)  |  42 pages Summary Focus Central banks increasingly use macroprudential tools. These tools interact with monetary policy in affecting credit supply and thereby the economy. Yet studying this interaction is difficult, because monetary policy and macroprudential tools work in a similar way and address similar objectives. Contribution Our main contribution is to identify the interaction of monetary and macroprudential policies in international bank

Topics:
International Settlement considers the following as important:

This could be interesting, too:

Tony Yates writes Monetary policy delegation rebounded, and an odd trade-off

Amol Agrawal writes A new museum in Paris is all about money

Amol Agrawal writes The tenures under RTI Act should not have been amended but applied to financial regulators too..

International Settlement writes Bank failure management – the role of deposit insurance

BIS Working Papers  |  No 782  | 
15 May 2019
PDF full text
 (666kb)
 |  42 pages

Summary

Focus

Central banks increasingly use macroprudential tools. These tools interact with monetary policy in affecting credit supply and thereby the economy. Yet studying this interaction is difficult, because monetary policy and macroprudential tools work in a similar way and address similar objectives.

Contribution

Our main contribution is to identify the interaction of monetary and macroprudential policies in international bank lending. This is challenging to do within a single country, given the similarities between the two types of policy. We focus on cross-border lending in three reserve currencies: the US dollar, the euro and the yen. The monetary policies associated with these three currencies are independent of domestic macroprudential policies used in the home country of the lending bank. As an example, we look at how US monetary policy interacts with UK macroprudential policy in affecting cross-border bank lending from UK banks to borrowers in foreign countries, such as Malaysia. Using a rarely accessed BIS data set, we exclude observations where independence is not guaranteed. In the previous example, we exclude the United States both as a home banking system and as a borrowers' country. This allows us to study precisely how the two policies work together.

Findings

We find significant policy interaction. Tighter UK macroprudential policy mitigates the negative (positive) impact of US monetary policy tightening (easing) on US dollar cross-border lending from UK banks. Conversely, easier macroprudential policy amplifies the impact of monetary policy. The results imply that this interaction has an economically and statistically significant impact on cross-border loan supply.

 

Abstract

We combine a rarely accessed BIS database on bilateral cross-border lending flows with cross-country data on macroprudential regulations. We study the interaction between the monetary policy of major international currency issuers (USD, EUR and JPY) and macroprudential policies enacted in source (home) lending banking systems. We find significant interactions. Tighter macroprudential policy in a home country mitigates the impact on lending of monetary policy of a currency issuer. For instance, macroprudential tightening in the UK mitigates the negative impact of US monetary tightening on USD-denominated cross-border bank lending outflows from UK banks. Vice-versa, easier macroprudential policy amplifies impacts. The results are economically significant.

JEL classification: F34, F42, G21, G38

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

International Settlement
The Bank for International Settlements (BIS) is an international company limited by shares owned by central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks". The BIS carries out its work through subcommittees, the secretariats it hosts and through an annual general meeting of all member banks. It also provides banking services, but only to central banks and other international organizations. It is based in Basel, Switzerland, with representative offices in Hong Kong and Mexico City.

Leave a Reply

Your email address will not be published. Required fields are marked *