international banking and cross-border effects of …international banking and cross-border effects...

42
International Banking and Cross-Border Effects of Regulation: Lessons from the United States Jose M. Berrospide, a Ricardo Correa, a Linda S. Goldberg, b and Friederike Niepmann a a Federal Reserve Board b Federal Reserve Bank of New York Domestic prudential regulation can have unintended effects across borders and may be less effective in an environment where banks operate globally. Using U.S. micro-banking data for the first quarter of 2000 through the third quarter of 2013, this study shows that some regulatory changes indeed spill over. First, a foreign country’s tightening of limits on loan-to- value ratios and local-currency reserve requirements increases lending growth in the United States through the U.S. branches and subsidiaries of foreign banks. Second, a foreign tighten- ing of capital requirements shifts lending by U.S. global banks away from the country where the tightening occurs to the United States and to other countries. Third, tighter U.S. cap- ital regulation reduces lending by large U.S. global banks to foreign residents. JEL Codes: F42, F44, G15, G21. 1. Introduction In the period since the global financial crisis, policy discussions have highlighted the potential need for the active use of macropru- dential instruments to support financial stability goals. But some The authors thank Jacob Conway and Eric Parolin for excellent research assistance. We also thank anonymous referees, Sirio Aramonte, Stijn Claessens, Valeriya Dinger, Kebin Ma, Marcus Pramor, Jana Ohls, Tim Schmidt-Eisenlohr, Judith Temesvary, and participants at the 2016 IBEFA summer meeting and the Norges Bank’s Financial Stability and Macroprudential Policy workshop for very useful feedback. The views expressed in this paper are solely those of the authors and should not be interpreted as reflecting the view of the Board of Governors, the Federal Reserve Bank of New York, or the staff of the Federal Reserve System. 435

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Page 1: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

International Banking and Cross-Border Effectsof Regulation: Lessons from the United States∗

Jose M. Berrospide,a Ricardo Correa,a Linda S. Goldberg,b

and Friederike Niepmanna

aFederal Reserve BoardbFederal Reserve Bank of New York

Domestic prudential regulation can have unintended effectsacross borders and may be less effective in an environmentwhere banks operate globally. Using U.S. micro-banking datafor the first quarter of 2000 through the third quarter of 2013,this study shows that some regulatory changes indeed spillover. First, a foreign country’s tightening of limits on loan-to-value ratios and local-currency reserve requirements increaseslending growth in the United States through the U.S. branchesand subsidiaries of foreign banks. Second, a foreign tighten-ing of capital requirements shifts lending by U.S. global banksaway from the country where the tightening occurs to theUnited States and to other countries. Third, tighter U.S. cap-ital regulation reduces lending by large U.S. global banks toforeign residents.

JEL Codes: F42, F44, G15, G21.

1. Introduction

In the period since the global financial crisis, policy discussionshave highlighted the potential need for the active use of macropru-dential instruments to support financial stability goals. But some

∗The authors thank Jacob Conway and Eric Parolin for excellent researchassistance. We also thank anonymous referees, Sirio Aramonte, Stijn Claessens,Valeriya Dinger, Kebin Ma, Marcus Pramor, Jana Ohls, Tim Schmidt-Eisenlohr,Judith Temesvary, and participants at the 2016 IBEFA summer meeting and theNorges Bank’s Financial Stability and Macroprudential Policy workshop for veryuseful feedback. The views expressed in this paper are solely those of the authorsand should not be interpreted as reflecting the view of the Board of Governors,the Federal Reserve Bank of New York, or the staff of the Federal Reserve System.

435

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436 International Journal of Central Banking March 2017

macroprudential instruments might not work as intended and haveeffects that propagate across borders through the global linkages ofinternational financial institutions. In the presence of cross-borderbanking, domestic policies might not be effective, as they do notapply to the same degree to banks headquartered in foreign coun-tries. Changes in domestic prudential instruments might also spillover into foreign markets, because domestic banks affected by thepolicies adjust their operations globally.1

This paper analyzes these issues focusing on the United Statesand attempts to answer three questions. First, do changes in foreignprudential instruments affect lending growth in the United States?Second, do U.S. global banks adjust their foreign operations whenforeign prudential instruments change? Third, do U.S. regulatorychanges spill over into foreign countries via U.S. global banks? Wefind evidence of both spillovers of foreign regulatory changes into theUnited States and cross-border effects of U.S. prudential instrumentchanges.

The United States is an interesting case, as its banking sec-tor is markedly interconnected with the rest of the world. Foreignglobal banks expanded their operations in the United States inthe 2000s through local branches and through separately charteredbanks (Tarullo 2012). U.S. global banks have substantial exposuresto advanced economies and to emerging market countries throughcross-border lending, funding, and affiliates located abroad (Cetorelliand Goldberg 2006).

Our analysis uses regulatory reports filed by U.S. global banksand by the U.S. subsidiaries and branches of foreign banks. Thesebank-level data for 2000:Q1 through 2013:Q3 are combined with adatabase of prudential instruments newly constructed by the Inter-national Banking Research Network (IBRN) (see Cerutti et al. 2017for a description of the IBRN Prudential Instruments Database).The database has information on the use of seven different pruden-tial instruments by sixty-four countries. Our methodology largely

1Lim et al. (2011), Akinci and Olmstead-Rumsey (2015), Cerutti, Claessens,and Laeven (2015), and Vandenbussche, Vogel, and Detragiache (2015) analyzethe effectiveness of macroprudential policies in curtailing credit growth and houseprice inflation using cross-country data. Cross-border spillovers of prudential poli-cies are explored in Aiyar, Calomiris, and Wieladek (2014), Aiyar et al. (2014),and Danisewicz, Reinhardt, and Sowerbutts (2015).

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Vol. 13 No. S1 Lessons from the United States 437

follows that described in Buch and Goldberg (2017) and is partof the joint research effort of the IBRN on cross-border prudentialpolicy spillovers.2

Our first specifications test whether U.S. global banks andU.S. branches and subsidiaries of foreign banks adjust their lend-ing in response to foreign prudential instrument changes. Wefind statistically significant effects for three instruments: capitalrequirements, local-currency reserve requirements, and limits onloan-to-value (LTV) ratios. The tightening of prudential instru-ments abroad increases loan growth in the United States. Higherforeign-country capital requirements abroad mainly affect U.S. loangrowth through U.S. global banks, while higher local-currencyreserve requirements and limits on LTV ratios mainly transmitthrough the lending of the U.S. branches and subsidiaries of foreignbanks.

Our second set of tests investigates whether U.S. global banks’exposures in foreign countries react to prudential instrument changesthere. The evidence is weaker in this case. Foreign changes in pru-dential instruments have a weak and mostly insignificant effect onU.S. banks’ claims on residents in the country where the changeoccurs.

Lastly, we explore whether changes in U.S. prudential instru-ments have effects across borders. While foreign economies haveused a combination of both cyclical and structural instruments, U.S.policymakers have favored structural regulations that are less corre-lated with the financial cycle and are not changed frequently (Elliott,Feldberg, and Lehnert 2013). As a result, the only U.S. instrumentchange recorded in the IBRN Prudential Instruments Database isrelated to the introduction of the Basel II.5 capital regulations in2013:Q1. Our results indicate that after this change the largest U.S.banks, those that are required to participate on annual stress tests

2The following studies are part of the IBRN study on the impact of prudentialinstrument changes on the activities of global banks: Auer, Ganarin, and Towbin(2017); Avdjiev et al. (2017); Baskaya et al. (2017); Bonfim and Costa (2017);Bussiere, Schmidt, and Vinas (2017); Caccavaio, Carpinelli, and Marinelli (2017);Damar and Mordel (2017); Frost, de Haan, and van Horen (2017); Gajewski andKrzesicki (2017); Hills et al. (2017); Ho and Wong (2017); Jara and Cabeza(2017); Levin-Konigsberg et al. (2017); Nocciola, Zochowski, and Franch (2016);Ohls, Pramor, and Tonzer (2017); Park and Lee (2017).

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438 International Journal of Central Banking March 2017

or follow the Advanced Approaches capital framework, reduced theirforeign lending growth relative to the smaller banks.3

Taken together, and focusing on the response of U.S. globalbanks, our results indicate that U.S. prudential regulation reducesforeign lending, whereas tighter foreign prudential regulationincreases total lending and shifts this lending away from the hostcountries undertaking regulatory changes. In general, the magni-tudes of the identified spillovers across all the exercises appear tobe small. Changes in foreign capital requirements probably had themost significant economic effect: we calculate that stricter capitalrequirements abroad added a total of $249 billion in lending of U.S.global banks over the period from 2000:Q1 to 2013:Q3.

While our results are broadly consistent with the existing evi-dence on cross-border spillovers, there are some important differ-ences that we have identified. The effect of higher U.S. capitalrequirements are consistent with Aiyar et al. (2014), who documentthat tighter capital requirements for U.K. banks decreased thesebanks’ cross-border lending. In the U.S. data, cross-border spilloversof higher capital requirements work in both directions. Tighter capi-tal standards abroad increased lending growth in the United States,mainly through U.S. global banks. While banks may cut lendingat home and abroad to comply with higher capital standards, thechange of capital requirements in one country affects the relativeprofitability of lending in different parts of the global banking organi-zation. When capital requirements are higher abroad, domestic lend-ing might become relatively more profitable compared with foreignlending through foreign subsidiaries subject to the higher capitalrequirements. The fact that higher local-currency reserve require-ments and limits on LTV ratios abroad have positive effects on U.S.lending growth follows a similar logic.

The weak response of U.S. global banks’ lending to foreign pol-icy changes in the countries where the policy changes occur issomewhat consistent with the evidence on leakages presented by

3More information about the Advanced Approaches capital framework can befound at this link: https://www.federalreserve.gov/bankinforeg/basel/advanced-approaches-capital-framework-implementation.htm. Information about the U.S.stress tests conducted by U.S. bank supervisors can be found at this location:https://www.federalreserve.gov/bankinforeg/stress-tests-capital-planning.htm.

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Vol. 13 No. S1 Lessons from the United States 439

Aiyar, Calomiris, and Wieladek (2014) and Reinhardt and Sower-butts (2015), who show that foreign bank lending expands when theregulation of domestic banks tightens. While we do not find thatU.S. banks expand their lending growth, we do not find them con-tracting their lending growth either, suggesting that foreign policychanges might not be able to impact these banks’ local operations.This result contrasts with those in Temesvary (2015), who finds sig-nificant responses of U.S. banks’ foreign activities to stricter bankregulation in host countries. Part of the divergence in these resultsmay be explained by the use of different cross-country regulatorydata and different methodologies for measuring the effect of changesin prudential instruments.

A related literature with contributions by Houston, Lin, andMa (2012) and Bremus and Fratzscher (2014) exploits a databasedeveloped by Barth, Caprio, and Levine (2013), which capturesdifferences in bank regulation and supervision across countries, toanalyze changes in global banking activities. Using information oncross-border bank flows, they find evidence for regulatory arbi-trage through cross-border lending. As opposed to our paper, theirtests rely on aggregate bank flows instead of bank-specific claims.In another cross-country study, Ongena, Popov, and Udell (2013)find effects of tighter home-country regulation on banks’ risk takingabroad.

The next section describes the data used in the various exer-cises testing the transmission of prudential policies through foreignbanks operating in the United States, and through U.S. global banks.Section 3 presents the empirical methodology and key empiricalresults. Section 4 concludes, emphasizing that despite limited realconsequences for the U.S. economy over the past decade, prudentialinstruments applied abroad have the potential to more significantlyinfluence U.S. loan growth in the future.

2. Data and Stylized Facts for the United States

Our analysis examines prudential policy spillovers internation-ally using four distinct bank panels. The first panel coversU.S.-headquartered global banks’ total lending and varies by bankand quarter. The second data set adds a country dimension to thebank and time dimension, capturing U.S. global banks’ claims in

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440 International Journal of Central Banking March 2017

different locations through cross-border flows or through branchesor subsidiaries established in foreign markets. The two other micro-banking data sets cover foreign bank lending in the United States.One contains data on foreign-owned bank subsidiaries operating inthe United States, while the other consists of data on U.S. branchesof foreign banks. The data for U.S. global banks and for subsidiariesof foreign banks within the United States span the first quarter of2000 through the third quarter of 2013, while the U.S. branches offoreign banks data set spans the fourth quarter of 2002 through thethird quarter of 2013.4

2.1 Bank-Level Data

2.1.1 Data Sources

U.S. commercial bank data cover both U.S. global banks and theU.S. subsidiaries of foreign banks. Balance sheet, income statement,and select off-balance-sheet data for them are drawn from the Fed-eral Financial Institutions Examinations Council (FFIEC) 031 form,better known as the Call Report. Income statement, balance sheet,and selected off-balance-sheet data on U.S. bank holding compa-nies are drawn from the FR Y-9C form. The FFIEC 009 form onthe international exposures of U.S. reporting banks is the sourceof detailed information on the geographic distribution of U.S. bankclaims on foreign residents. A bank is defined as a U.S. global bankif it reports the FFIEC 009 and is headquartered in the UnitedStates. Capital and asset data for foreign bank holding companiesin our aggregated branch data set are drawn from the FR Y-7Qform. Balance sheet and off-balance-sheet data pertaining to U.S.branches and agencies of foreign banking organizations are drawnfrom FFIEC 002 filings, aggregated across U.S. branches to thelevel of the “top bank” within the global banking organization.5

National Information Center (NIC) data are used to connect com-mercial banks to their high holders. All of these data filings are

4We end the analysis in 2013:Q3 since the FFIEC 009 reporting form changedthe next quarter. The FR Y-7Q form used in branch regressions was not intro-duced until 2002:Q4.

5“Bank” in this context includes bank holding companies and commercialbanks.

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Vol. 13 No. S1 Lessons from the United States 441

quarterly, with the exception of the FR Y-7Q.6 Although much ofthe bank-level data are publicly available, bank-level data from theFFIEC 009 report are confidential.7 Further details on data sourcesand variable construction are in table 7 in the appendix.8

2.1.2 Definition of Dependent Variables

Most of the dependent variables have bank and time dimensions,with ΔYb,t defined as the change in log loans by bank b at timet. For some specifications, these loans are divided by their location(U.S. versus foreign addressees).

For a more detailed analysis of the response of U.S. global banks’foreign lending to policy changes (outward analysis), a country jdimension is added, with ΔYb,j,t defined as the change in log claimsextended by bank b to counterparties in country j at time t.9 Theseclaims can be cross-border, in which case they are extended froma particular location to a counterparty external to that location, orlocal, in which case the global bank affiliate in a location extendsclaims to borrowers in that location.

2.1.3 Bank-Level Variables

As the composition of bank balance sheets may influence the effectsof prudential instruments, the data set also includes bank size as

6The FR Y7-Q is filed quarterly by foreign banking organizations (FBOs)whose activities are deemed to be effectively that of a financial holding company,and is filed annually by all other FBOs. Data from the FR Y-7Q are then lin-early interpolated in order to construct quarterly data for foreign bank holdingcompanies (BHCs).

7Most of the data collected on the FR Y-9C, FFIEC 031, FFIEC 002, and FRY-7Q are available to the public, but there are a small number of series that areconfidential.

8The data are trimmed to exclude or correct for potential reporting errors andnoise. First, we identify outliers and exclude these observations from all descrip-tive tables and analysis. Observations are identified as outliers if they satisfy atleast one of the following four criteria where applicable: (i) a change in log claimsor loans > 1 or < −1 (precluding most major mergers and acquisitions), (ii) atier 1, illiquid assets, core deposits, or international ratio which is > 100 percentor < 0 percent, (iii) not part of a consecutive string of bank-time observationsat least eight quarters in length, or (iv) their home country changes between ourcontemporaneous and lagged periods.

9The term “claims” includes loans and securities holdings of banks.

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442 International Journal of Central Banking March 2017

captured by log of total real assets (LogTotalAssetsb,t−1), percent-age of a bank’s portfolio of assets that is illiquid (IlliquidAsset-Ratiob,t−1), percentage of the banking organization’s balance sheetfinanced with core deposits (CoreDepositsb,t−1), percentage of thebanking organization’s regulatory tier 1 risk-based capital-to-assetratio (Tier1Ratiob,t−1), percentage of the banking organization’s netdue to minus net due from head office relative to total assets (Net-DueTF b,t−1), and percentage of international activity as proxiedby the ratio of the banking organization’s foreign deposits plus totalclaims relative to total assets (InternationalRatiob,t−1).10 The analy-sis also utilizes information on the nationality of the foreign parentof branches and subsidiaries hosted in the United States.

2.1.4 Summary Statistics and Features of theU.S. Banking System

The sample of reporting banks and characteristics of balance sheetdata are summarized in table 1. The number of distinct reportingentities for each data set is provided in the first data row. The sec-ond row reports the number of observations used in the empiricalanalysis, combining information on the number of entities and thenumber of quarters for each entity. For the outward transmissionthrough global banks, the number of observations reflects a combi-nation of the number of global banks active throughout our sampleperiod and the number of countries in which each of these banksreports claims or local funding activity at each quarter.

These summary statistics provide a broad overview of the creditactivities of the financial institutions captured in our empiricalanalysis. In general, the United States is a financial center, both host-ing the offices of several foreign financial institutions and serving asthe headquarters location for a group of large global banks. The U.S.offices of foreign banks, branches, and subsidiaries account for 18 to23 percent of U.S. bank assets in our sample period, with their loansrepresenting between 12 and 17 percent of total loans in the UnitedStates. The largest foreign participants in the U.S. banking sectorare headquartered in advanced economies, particularly in Europe.

10Total assets are converted to 2012:Q1 dollars using GDP deflator data fromthe U.S. Bureau of Economic Analysis.

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Vol. 13 No. S1 Lessons from the United States 443Tab

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444 International Journal of Central Banking March 2017

Similarly, U.S. global banks have a notable presence in foreignmarkets. Foreign claims, which are composed of cross-border claimsand claims originated at foreign offices, for the U.S. global banksin our sample average about 9 percent of total assets. Total claimsincreased from 8 to 10 percent of total assets, on average, between2002 and 2012. Most of this increase is accounted for by growthin affiliate local claims, which rose from 2 to 5 percent of totalassets during that period (cross-border claims dropped slightly from6 to 5 percent). By country of destination, between 2002 and 2012total claims to advanced foreign economies went up from 4 to 7percent and those to emerging market economies decreased from 4to 3 percent. The U.S. branches and subsidiaries of foreign bankshave higher U.S. lending growth rates, on average, compared withU.S. global banks. Variability in lending is highest for the U.S.branches of foreign banks. For U.S. global banks, the growth in for-eign claims by bank and by location is more volatile than lendingdomestically.

2.2 Data on Prudential Instruments

The prudential instruments included in the IBRN Prudential Instru-ments Database (Cerutti et al. 2017) are capital requirements,sector-specific capital buffers, limits on LTV ratios, concentrationratios, reserve requirements (local currency and foreign currency),and interbank exposure limits. Although the full database coverssixty-four countries, the only policies that enter into our regres-sion analysis are from those countries with banking entities in theUnited States or spanned by the claims of U.S. global banks. Forinward analysis through global banks, the prudential instrumentsare weighted aggregates across countries, with weights constructedon the basis of bank-specific information on country exposures ineach period.

For regression analysis of policy spillovers to yield convincingfindings, the specific prudential instruments used in each regressionmust have a sufficient level of variation. We screen for sufficientvariation by examining the counts of changes in each prudentialinstrument as relevant for the particular banking entities in eachdata subset, the number of countries associated with those changes,

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Vol. 13 No. S1 Lessons from the United States 445

and the number of tightening and loosening observations. The pan-els of table 2 show this information for the four data sets. Whilethere is not a well-defined rule available for determining a sufficientdegree of variation for regressors in an econometric specification,we apply a judgmental approach to capture a sufficient numberof episodes and number of countries. As a result of this screeningwe exclude concentration ratios in our outward and inward trans-mission analysis for U.S. global banks, and exclude foreign reserverequirements, interbank exposure limits, and concentration ratiosfrom our inward transmission analysis for U.S. branches of foreignbanks.

2.3 Data on Country Business and Financial Cycles

The analysis introduces controls for country business cycles andcredit cycles. These controls are not only important to account forcredit demand conditions but also for assessment of whether theeffects of the prudential instruments vary over the cycle. Details onthe construction of the business cycle control (output gap) and thefinancial cycle control (credit-to-GDP gap) are described in Bankfor International Settlements (2014) and Drehmann, Borio, andTsatsaronis (2011), respectively.

3. Empirical Method and Regression Results

This section provides conceptual observations on how changes inprudential instruments might spill over internationally into lend-ing activity, presents the main empirical specifications, and reportsresults for the analysis on the impact of prudential regulations onbank claims both in the United States and abroad. Section 3.1focuses on the spillovers of foreign regulatory changes to U.S. lend-ing. Section 3.2 explores the effect of changes in foreign regulationson the activities of U.S. global banks in foreign locations. It alsoanalyzes the response of U.S. global banks’ foreign activities whenU.S. capital requirements change.

While more extensively discussed in Buch and Goldberg (2017),changes in capital requirements, reserve requirements, and loan-to-value ratios could spill over to bank lending through various channels

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446 International Journal of Central Banking March 2017Tab

le2.

Sum

mar

ySta

tist

ics

onC

han

ges

inP

ruden

tial

Inst

rum

ents

Exposu

re-

Wei

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ase

Dat

a(B

efore

Aggre

gat

ing

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eighte

dM

easu

res)

Obse

rvat

ions

No.of

No.of

No.of

Countr

y-

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y-

No.of

Countr

y-

Tim

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ime

Ban

k-

Pro

port

ion

Pro

port

ion

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han

ges

Chan

ges

Tim

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stru

men

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ges

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hte

nin

g)

(Loose

nin

g)

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ges

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ero

Non-z

ero

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d—U

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ks

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502

329

173

1,40

00.

170.

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men

ts64

640

258

0.03

0.24

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pec

ific

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er69

5118

545

0.02

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(con

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Vol. 13 No. S1 Lessons from the United States 447

Tab

le2.

(Con

tinued

)

Exposu

re-

Wei

ghte

dB

ase

Dat

a(B

efore

Aggre

gat

ing

toExposu

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No.of

No.of

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y-

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men

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ctor

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ific

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er17

143

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3123

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176

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128

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ific

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480.

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his

table

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mm

ary

stat

isti

cson

chan

ges

inth

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rum

ents

inhom

ean

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the

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tes.

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for

U.S

.gl

obal

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ries

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2000

:Q1

to20

13:Q

3.T

he

U.S

.bra

nch

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ign

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4to

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aon

the

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ents

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abas

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al.(2

017)

and

are

onth

equ

arte

rle

vel.

The

table

isbas

edon

the

esti

mat

ion

sam

ple

.T

he

table

show

sth

eto

talnu

mber

ofch

ange

s,i.e.

,ti

ghte

nin

gor

loos

enin

g,fo

rea

chin

stru

men

tas

wel

las

the

pro

por

tion

ofnon

-zer

oen

trie

s.A

llhom

ean

d/o

rdes

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ion

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ofban

kslo

cate

din

the

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tes

are

incl

uded

.

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448 International Journal of Central Banking March 2017

that depend on the institutions examined. Consider first a changein capital requirements abroad. U.S. global banks that operate for-eign subsidiaries need to finance their foreign assets with subsidiary-specific capital. When foreign capital requirements are tightened,U.S. parent banks may cut lending in these markets and employ theavailable funding for lending in a different location. In contrast, thedirection of effects of tighter capital requirements in foreign banks’home countries on their U.S. subsidiaries is less clear. On the onehand, tighter capital requirements in the foreign bank’s home coun-try imply that the bank must finance its balance sheet with morecapital on a consolidated basis. To achieve this, the parent bank mayreduce lending both at home and abroad. However, tighter capitalrequirements at home also mean that the relative costs of lending athome and abroad change, with lending abroad becoming relativelyless expensive.

As opposed to the stand-alone structure of subsidiaries, the assetsin branches of foreign banks are directly linked to parent banks’ bal-ance sheets. A reduction of lending in the U.S. branches should thushave the same effect on the parent bank’s tier 1 ratio as a reductionof lending in its home offices. One would therefore expect that highercapital requirements at home lead to a reduction in lending by U.S.branches of foreign banks, as the parent bank seeks to comply withhigher capital standards.

Local-currency reserve requirements used as prudential tools areput in place by national monetary authorities to control the growthin domestic credit. Higher reserve requirements imply that banksneed to hold a larger fraction of funds as reserves with the cen-tral bank and can lend out only a smaller fraction to local borrow-ers. Reserve requirements in local currency, however, do not con-strain the bank’s activities in other countries. Since local fundingbecomes more expensive, banks have an incentive to raise fundingabroad and could move operations to other locations. They could dothis by increasing lending of their foreign branches or their foreignsubsidiaries.

Limits on LTV ratios are aimed at reducing credit in the econ-omy and often are specifically targeted at counteracting a potentialreal estate bubble. Such limits apply to all banks that engage inmortgage lending in a given country by decreasing the pool of eligi-ble borrowers. A tightening of LTV limits should thus decrease the

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Vol. 13 No. S1 Lessons from the United States 449

local lending opportunities for all banks and might induce a shift inlending to other markets.

Within regression specifications, the exact mechanisms throughwhich adjustments occur are not constrained by instrument and typeof entities considered. Some policy instruments affect all banks thatoperate in a given market, as is the case of loan-to-value ratios. Otherinstruments may differentially affect banks in relation to their modeof servicing a location, as could be the case with capital require-ments, or the structure of their balance sheets in the case of reserverequirements.

3.1 Inward Analysis: Spillovers into the United States fromForeign Prudential Policies

The inward transmission analysis investigates the consequences forlending in the United States of foreign prudential policies throughtwo channels. First, U.S. banks with large foreign activities mightrespond to changes in regulation abroad by reallocating activityacross foreign and domestic locations. Second, foreign banks thathave to comply with home-country regulation might adjust lendingby their U.S. subsidiaries or U.S. branches.11

3.1.1 Specifications

We run regressions separately for (i) U.S. global banks, (ii) U.S. sub-sidiaries of foreign banks, and (iii) U.S. branches of foreign banks.In each specification, we regress the log change in lending ΔYb,t byentity b in quarter t on a relevant measure of foreign prudentialpolicy changes, including several lagged bank characteristics Xb,t−1(see section 2.1 for details) as well as bank and quarter fixed effects.We also control for financial and business cycle variables. Effec-tively, these regressions show whether policy changes abroad hadan effect on lending growth by entity b, after controlling for a bank-specific time-invariant component in entity b’s lending growth anda quarter-specific shift in lending growth common to all entities inthe sample.

11U.S. credit could also be affected through foreign banks that do not haveU.S. affiliates but lend cross-border to U.S. firms.

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450 International Journal of Central Banking March 2017

We estimate the following equation on the sample of fifty-nineU.S.-headquartered banks with sizable exposures in foreign countries(global banks):

ΔYb,t = α0 +2∑

k=0

αk+1ExpPb,t−k + α4Xb,t−1 + α5Zb,t

+ fb + ft + εb,t, (1)

where ExpPb,t−k stands for the foreign-exposure-weighted index andcaptures the extent to which policies are tightened or loosened incountries where entity b has exposures in quarter t−k.12 To controlfor foreign-country financial and economic developments, the regres-sion also controls for exposure-weighted credit-to-GDP and outputgap variables Zb,t.13 Different prudential policies are explored usingthis specification and for this bank panel. Prudential policy effectscan be immediate (k = 0) or appear over the next two quarters(k = 1, 2). Standard errors are robust.

The regression equation for the 102 U.S. subsidiaries of foreignbanks and 137 U.S. branches of foreign banks is given by

ΔYb,j,t = α0 +2∑

k=0

αk+1HomePj,t−k + α4Xb,t−1 + α5Zj,t

+ fb + ft + εb,j,t, (2)

where HomePj,t−k indicates whether regulation tightened or loos-ened in home country j of entity b in quarter t − k. Zj,t includes

12The exposure-weighted prudential index for bank b at time t is calculatedusing this formula:

ExpPb,t =∑

j �=USA

PPjt · ϕjb,t−1, where · ϕjb,t−1 =

∑t−1t=t−4 claimsbjt

∑j �=USA

∑t−1t=t−4 claimsbjt

.

The term PP jt in the formula above stands for any of the indexes that measurethe change in one of the prudential instruments (e.g., limits on LTV ratios, capi-tal requirements, etc.) by regulators across all countries spanned by j. The termclaimsbjt represents bank b’s claims on country j at time t through the FFIEC009 reports.

13The exposure-weighted cycle variables are constructed in parallel to theexposure-weighted prudential index. For details, see footnote 12.

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Vol. 13 No. S1 Lessons from the United States 451

country-specific measures of the home country’s credit-to-GDP gapand output gap. Standard errors are clustered at the country level.

3.1.2 Spillovers into the United States

Table 3 presents the results of the inward transmission through U.S.global banks, U.S. subsidiaries of foreign banks, and U.S. branchesof foreign banks. We only display results for those prudential instru-ments for which we find significant effects for at least one of thesethree types of entities. The table presents estimates of contempo-raneous effects and two periods of lagged effects. It also displaystests of the sum of effects, with the presentation columns organizedboth by instrument and entity type. Three instruments show signif-icant inward spillovers: capital requirements, local-currency reserverequirements, and LTV limits. Tighter foreign capital requirementsincrease the lending of U.S. global banks and of U.S. subsidiaries offoreign banks (the evidence for subsidiaries is weaker though), butdo not significantly affect lending by the U.S. branches of foreignbanks. In contrast, tighter foreign limits on LTV ratios and local-currency reserve requirements cause U.S. subsidiaries and branchesof foreign banks to increase their lending. We do not find significanteffects on lending of foreign changes in sector-specific capital buffers.The PruC index, which aggregates prudential policy changes over allinstruments, has largely insignificant effects, probably because theconsequences for lending growth vary substantially by prudentialinstrument and are more appropriately evaluated in isolation.14

Interestingly, both bank-specific characteristics and country con-ditions drive quarterly lending growth rates. Lending growth by U.S.affiliates of foreign banks follows home-country financial and eco-nomic conditions. In particular, lending growth by U.S. subsidiariesis relatively strong when the home country has slower growth, whilelending growth by U.S. branches is stronger when the credit-to-GDPgap is higher in the home country (implying a larger gap betweenthe credit-to-GDP ratio and its long-term trend). In contrast, the

14The effects of changes in concentration ratios were not analyzed because oflimited variation in foreign policies in all three samples. For the same reason, theeffects of changes in exposure limits and foreign reserve requirements were notexplored for U.S. affiliates of foreign banks.

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452 International Journal of Central Banking March 2017

Tab

le3.

Inw

ard

Spec

ifica

tion

Cap

ital

Req

uir

emen

tsR

eser

ve

Req

uir

emen

ts:Loca

lLoan

-to-V

alue

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io

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bal

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bal

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bal

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ks

Subs

Bra

nch

esB

anks

Subs

Bra

nch

esB

anks

Subs

Bra

nch

es(1

)(2

)(3

)(4

)(5

)(6

)(7

)(8

)(9

)

Pt

0.03

6∗∗

0.01

6−

0.01

3−

0.00

30.

016∗

∗0.

024

0.04

3−

0.01

30.

018∗

(0.0

18)

(0.0

09)

(0.0

23)

(0.0

08)

(0.0

07)

(0.0

14)

(0.0

31)

(0.0

09)

(0.0

09)

Pt−

10.

009

0.00

8−

0.00

9−

0.00

10.

014

0.00

2(0

.008

)(0

.007

)(0

.019

)(0

.011

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.011

)P

t−2

−0.

005

0.02

6∗∗∗

0.00

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0.01

00.

021∗

∗0.

007

(0.0

07)

(0.0

04)

(0.0

10)

(0.0

10)

(0.0

10)

(0.0

14)

Log

Tot

alA

sset

s t−

1−

0.06

6∗∗∗

−0.

039∗

∗∗−

0.01

8−

0.06

7∗∗∗

−0.

040∗

∗∗−

0.01

8−

0.06

7∗∗∗

−0.

040∗

∗∗−

0.01

8(0

.015

)(0

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.013

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.015

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.013

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.015

)(0

.009

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.013

)T

ier

1R

atio

t−1

0.00

2∗∗

0.00

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0.00

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∗0.

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000

0.00

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0.00

0−

0.00

0(0

.001

)(0

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uid

Ass

ets

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00)

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00)

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00)

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00)

Net

Due

To t

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003

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ore

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ISFin

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ycle

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0.00

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00)

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00)

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00)

(0.0

00)

(0.0

00)

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00)

(con

tinu

ed)

Page 19: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

Vol. 13 No. S1 Lessons from the United States 453

Tab

le3.

(Con

tinued

)

Cap

ital

Req

uir

emen

tsR

eser

ve

Req

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lLoan

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ks

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nch

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anks

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nch

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anks

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nch

es(1

)(2

)(3

)(4

)(5

)(6

)(7

)(8

)(9

)

BIS

Bus

ines

sC

ycle

t0.

000

0.00

5∗∗∗

0.00

20.

000

0.00

5∗∗∗

0.00

20.

000

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5∗∗∗

0.00

1(0

.003

)(0

.002

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.004

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.002

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.003

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.004

)In

tern

atio

nalA

ctiv

ity t

−1

0.00

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001∗

0.00

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(0.0

01)

(0.0

01)

(0.0

01)

Obs

erva

tion

s1,

873

2,80

14,

262

1,87

32,

801

4,26

21,

873

2,80

14,

262

R2

0.19

60.

191

0.10

00.

195

0.19

30.

100

0.19

70.

193

0.10

0A

djus

ted

R2

0.14

10.

142

0.05

90.

140

0.14

30.

059

0.14

10.

143

0.05

9N

o.of

Ban

ks59

102

137

5910

213

759

102

137

Pro

por

tion

ofP

tN

on-z

ero

0.14

50.

020

0.03

00.

549

0.01

40.

056

0.37

00.

033

0.05

1P

tC

oeffi

cien

tSu

m0.

001

0.05

0∗∗∗

0.02

30.

031

0.02

20.

027∗

p-va

lue

[0.9

14]

[0.0

00]

[0.2

46]

[0.2

70]

[0.2

63]

[0.0

67]

Note

s:T

his

table

repor

tsth

eeff

ects

ofch

ange

sin

capit

alre

quir

emen

ts,

loca

l-cu

rren

cyre

serv

ere

quir

emen

ts,

and

LT

Vlim

its.

The

sam

ple

per

iod

for

U.S

.gl

obal

ban

ksan

dfo

rsu

bsi

dia

ries

offo

reig

nban

ksis

2000

:Q1

to20

13:Q

3.T

he

U.S

.bra

nch

esof

fore

ign

ban

ksdat

ase

tgo

esfr

om20

02:Q

4to

2013

:Q3.

Col

um

ns

1,4,

and

7sh

owth

ere

sult

sbas

edon

the

sam

ple

ofU

.S.gl

obal

ban

ks.C

olum

ns

2,5,

and

8ar

efo

rU

.S.

subsi

dia

ries

offo

reig

nban

ks,an

dco

lum

ns

3,6,

and

9ar

efo

rU

.S.bra

nch

esof

fore

ign

ban

ks.In

spec

ifica

tion

s(1

)to

(3),

the

vari

able

Pt

stan

ds

for

Exp

Pb

,t,th

eex

pos

ure

-wei

ghte

din

dex

.In

spec

ifica

tion

s(4

)to

(9),

Pt

stan

ds

for

Hom

ePj,t,th

epru

den

tial

index

that

captu

res

pru

den

tial

pol

icy

chan

ges

inen

tity

b’s

hom

eco

unt

ryj.For

mor

edet

ails

onth

eva

riab

les,

see

table

7in

the

appen

dix

.B

IScy

cle

vari

able

sar

esi

milar

lyco

nst

ruct

edas

expos

ure

-wei

ghte

dav

erag

esin

spec

ifica

tion

s(1

)to

(3).

All

spec

ifica

tion

sin

clude

tim

ean

dban

kfixe

deff

ects

assp

ecifi

edin

the

low

erpar

tof

the

table

.Sta

ndar

der

rors

are

robust

for

glob

alban

ks,an

dcl

ust

ered

byco

unt

ryfo

raffi

liat

ere

gres

sion

s.**

*,**

,an

d*

indic

ate

sign

ifica

nce

atth

e1

per

cent

,5

per

cent

,an

d10

per

cent

leve

l,re

spec

tive

ly.

Page 20: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

454 International Journal of Central Banking March 2017

negative and significant coefficients on the exposure-weighted credit-to-GDP gap indicate that the lending growth of U.S. global banksis lower when the credit-to-GDP gap in the countries where thesebanks operate is higher. This is likely because these banks refocustheir lending toward foreign countries and away from domestic lend-ing when foreign demand for credit is strong, a hypothesis that issupported by the positive coefficient on the credit-to-GDP gap inthe outward exercise.

Bank-level characteristics also help explain lending growth. Aftercontrolling for bank fixed effects on lending growth, U.S. globalbanks with higher tier 1 ratios (in the previous quarter) havestronger lending growth. This also holds for their foreign activities,as shown later in the outward exercise, and is consistent with previ-ous results in the literature.15 Tier 1 capital ratios do not appear asdrivers of foreign-owned bank lending growth in the United States.Instead, lending growth is stronger when illiquid asset ratios arelower.

Below we discuss the regression results of table 3 in more detailand evaluate the economic impact on loan growth in the U.S. fromchanges in capital requirements, local-currency reserve requirements,and limits on LTV ratios abroad.

3.1.3 Capital Requirements

The conjecture that foreign capital requirements could shift globalbank activity away from the host country is supported by theregression results. We find a significant positive effect of tightercapital requirements abroad on total lending by U.S. global banks(see column 1 of table 3).16 We also used as the dependent vari-able total lending minus loans to foreign banks, commercial andindustrial loans to foreign addressees, and loans to foreign gov-ernments and official institutions. Results based on these alterna-tive dependent variables show that the effects on lending growthare not limited to U.S. lending. U.S. banks increase domestic and

15See, e.g., Bernanke and Lown (1991) and Berrospide and Edge (2010).16Lagged values of the capital requirement index are dropped in the regressions

displayed in columns 1–3, since these were never significant.

Page 21: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

Vol. 13 No. S1 Lessons from the United States 455

third-country lending growth in response to higher foreign capitalrequirements.17

With regards to the lending of foreign-owned subsidiaries, theregression results indicate that our substitution effect from tighterhome capital requirements (lending abroad becomes relatively lessexpensive than home lending) can dominate the effect associatedwith the consolidated entity’s increased capital needs and give parentbanks a net incentive to expand subsidiary operations in the UnitedStates. However, overall the support for this effect is relatively weak:the estimated coefficient shown in column 2 is significant only at the11 percent level. The point estimate related to branch lending is notsignificant at conventional levels (see column 3).

How large is the positive effect on loan growth from tighter cap-ital requirements abroad? If there were a change in capital require-ments in all countries in which a U.S. bank holds claims, then thatbank’s lending growth would be 3.6 percentage points higher accord-ing to the estimated coefficient in column 1. This corresponds toaround 38 percent of one standard deviation of the dependent vari-able. The average value of the exposure-weighted index is 0.028 inthe sample, implying an average positive effect on a bank’s lendinggrowth rate of 0.1 percentage point.

We conduct a basic experiment to illustrate the magnitudes ofpotential spillovers from past capital requirement changes: (i) wecalculate the effect on a bank’s lending growth in each quarter, mul-tiplying the capital requirement index in each period with the esti-mated coefficient; (ii) we convert the effect on the bank’s lendinggrowth rate to a U.S. dollar value, taking into account the lendingvolume of the bank in the previous period; and (iii) we aggregatethe calculated U.S. dollar value over all banks. It is important tonote that the estimated coefficients often have large confidence inter-vals, so the resulting dollar amounts are rough estimates of potentialspillover effects.

Most of the regulatory changes in the sample occurred in thefirst quarter of 2012 and 2013 when several industrialized coun-tries introduced Basel II.5 and Basel III, respectively. In some of

17Detailed estimates are shown in table 8 in the appendix. As noted later, theoutward analysis shows that U.S. banks do not increase lending growth in thecountries where capital requirements are changed.

Page 22: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

456 International Journal of Central Banking March 2017

these countries, U.S. banks have large operations—for example, inCanada, Hong Kong, and Switzerland. Accordingly, the effect onaggregate lending of U.S. global banks is notable. Based on ourcalculations, the introduction of Basel II.5 or Basel III in 2012:Q1in twenty-eight countries led U.S. global banks to increase lendingby around 2.4 percentage points ($119 billion). Summed over allquarters, additional lending due to changes in capital requirementsabroad totaled $249 billion.

3.1.4 Local-Currency Reserve Requirements

The conjecture that higher local reserve requirements in the homecountry will make operations by foreign-owned affiliates in theUnited States relatively more attractive is supported by the regres-sion results, as can be seen in column 5 of table 3. Higher local reserverequirements in the home country increase a U.S. subsidiary’s lend-ing growth rate by a total of 5 percentage points over half a year(beta coefficient of 0.07). The contemporaneous and lagged coeffi-cients in the branch regression (column 6 of table 3) are not jointlysignificant at standard levels, but there is some weak evidence thatbranch lending responds as well since the coefficient on the con-temporaneous prudential variable is significant at the 11 percentlevel. Banks should not prefer to move activity to subsidiaries or tobranches in particular, since the impact of local reserve requirementsis not related to the bank’s organizational structure as discussedearlier.

U.S. global banks do not seem to respond at all to local reserverequirement changes abroad. In principle, changes in local reserverequirements in a market could also affect U.S. global banks thatoperate there. However, U.S. global banks do not fund themselvesto a significant extent in foreign/local currencies and are probablylittle affected by these types of regulatory changes.

We investigated whether banks respond symmetrically to tight-ening versus loosening reserve requirements. In terms of magnitudes,the effects appear to be similar but the timing of responses differs.The effect of a tightening unfolds immediately, while responses to aloosening of reserve requirements occur with a lag of half a year.

Figure 1 illustrates the aggregate effects of reserve require-ment changes abroad on lending by U.S. subsidiaries of foreign

Page 23: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

Vol. 13 No. S1 Lessons from the United States 457

Figure 1. Home-Country Local-Currency ReserveRequirements and Lending by U.S. Subsidiaries

of Foreign Banks

Notes: The chart shows the effect of changes in home-country local-currencyreserve requirements on lending by U.S. subsidiaries of foreign banks. Calcula-tions follow the methodology described in the text and are based on the estimatedcoefficients shown in column 5 of table 3. The figure plots by date the addi-tional lending by subsidiaries in U.S. dollar values due to observed changes inlocal-currency reserve requirements in these entities’ home countries.

banks following the methodology described earlier. The largest effectoccurred in 2012. On January18, 2012, the European Central Banklowered the reserve requirement ratio from 2 percent to 1 percent.India and China, which were parent countries for U.S. subsidiaries in2012, also lowered their local reserve requirements in this year. Sum-ming the U.S. dollar changes in lending from 2012:Q1 to 2012:Q3over subsidiaries suggests that the reduction in local reserve require-ments in this period led to roughly $7 billion lower lending by theseentities, a bit less than half a percent of their total lending over thesame period.

3.1.5 Limits on Loan-to-Value Ratios

The regression results in columns 8 and 9 of table 3 support theconjecture that banks headquartered abroad redirect activity to the

Page 24: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

458 International Journal of Central Banking March 2017

Figure 2. Home-Country Limits on LTV Ratios andLending by U.S. Subsidiaries and Branches of

Foreign Banks

Notes: The chart shows the effect of changes in home-country limits on LTVratios on lending by U.S. subsidiaries (dashed line) and branches (solid line) offoreign banks. Calculations follow the methodology described in the text and arebased on the estimated coefficients shown in columns 8 and 9 of table 3. Thefigure plots by date the additional lending by subsidiaries and branches in U.S.dollar values due to observed changes in limits on LTV ratios in these entities’home countries.

United States in response to tightened LTV limits in their homecounties. Lending by both U.S. branches and subsidiaries of foreignbanks expands in response to these changes.18

If tightening occurs in the parent country, lending growth byU.S. subsidiaries and U.S. branches of foreign banks increases by2.2 and 2.7 percentage points, respectively, based on estimates incolumns 8 and 9 (sum of contemporaneous and lagged coefficients).Figure 2 shows the aggregate effects of past changes in LTV limitsby quarter. The volatility of aggregate effects over time is mainly areflection of tightening and loosening in foreign countries. For sub-sidiaries, the switching signs on the contemporaneous versus lagged

18We did not find evidence for differential effects of tightening versus looseningLTV limits.

Page 25: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

Vol. 13 No. S1 Lessons from the United States 459

effects of policy changes (see column 8) also play a role. Most changesin LTV limits occurred after the 2007–08 financial crisis in advancedeconomies like Sweden, Canada, Norway, and the Netherlands butalso in developing countries like China and Brazil. Summing theeffects of past LTV changes over the sample period and over bothtypes of entities suggests that U.S. branches and subsidiaries lentout an additional $15 billion from 2003:Q3 to 2013:Q3 due to policychanges in their home countries. Subsidiaries contributed around 45percent, and branches around 55 percent, to the increase.19 Overallthe additional lending over the sample period is small, reflecting atiny fraction of these entities’ total lending (0.04 percent).20

3.2 Outward Analysis: International Response of U.S. GlobalBanks to U.S. and Foreign Prudential Policies

The outward transmission exercise assesses the effects of foreign pru-dential policies on the growth of U.S. banks’ claims to foreign coun-tries, including on the reallocation of U.S. banks’ external claimsacross foreign markets. The analysis also explores the impact of U.Sregulation on U.S. banks’ claims abroad.

3.2.1 Impact of Foreign Prudential Instruments onU.S. Banks’ Foreign Claims

First, we consider the impact of different prudential instrumentsused by the destination country on U.S. bank claims abroad. Eachof the prudential instrument measures enters the regression specifi-cation with its contemporaneous value and two lags. Formally, weestimate the regression equation:

ΔYb,j,t = α0 + (α1DestPj,t + α2DestPj,t−1 + α3DestPj,t−2)

+ α4Xb,t−1 + α5Zj,t + fj + ft + fb + εb,j,t, (3)

19The larger contribution of branches to this expansion stems from a largerimpact of an LTV ratio change on branch lending, compared with subsidiarylending, and the fact that more local reserve requirement changes occurred inthe home countries of U.S. branches.

20In 2013:Q3, total lending of branches in our data set was $518 billion versus$595 billion of subsidiaries.

Page 26: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

460 International Journal of Central Banking March 2017

where the prudential instrument changes are captured by DestP j,t,which records the changes in the prudential instruments of countryj in which U.S. bank b has exposures at time t. The dependent vari-able is the change in logs of U.S. bank b’s claims on countryj at timet evaluated on an ultimate risk basis.

Table 4 summarizes the main results for individual prudentialinstruments on the foreign claim growth of U.S. banks. Only two pru-dential instruments have some statistically significant coefficients:LTV ratio limits and interbank exposure limits. However, the sumof coefficients on these two measures for all lags is not significant,suggesting only a weak effect of prudential regulation in the des-tination countries on U.S. bank foreign claims. The weak resultshave two interpretations. First, while some of these policies havebeen actively used across U.S. counterparty countries, especially inemerging markets, exposures of U.S. global banks to emerging mar-kets are smaller than exposures to advanced economies; it may bethat global banks just choose to absorb the costs of the extra regu-lation. Alternatively, it may be that these policies are ineffective inchanging the growth of foreign claims at U.S. banks.

Among other drivers of total claim growth of U.S. global banks,the financial cycle variable has the expected signs in most cases,though the effects seem to be economically small. The negative andsignificant coefficient on the international ratio suggests that the for-eign claim growth is smaller for more diversified banks (banks withmore international activities). Core deposits are negatively relatedto total claims growth, reflecting the fact that U.S. banks withsmaller shares of core deposits on their balance sheets (and thus moredependent on wholesale funding) lend more to foreign residents. Thepositive and significant coefficient on both the illiquid assets ratioand the net due to ratio suggest that less liquid banks and bankswith more net internal borrowing from their parents exhibit a highergrowth rate in their foreign claims.

3.2.2 Impact of U.S. Prudential Instruments on U.S. Banks’Foreign Claims

Second, we test for the impact of changes in U.S. prudential instru-ments on U.S. banks’ foreign claims. The use of prudential instru-ments in the United States between 2000 and 2013 is essentially

Page 27: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

Vol. 13 No. S1 Lessons from the United States 461

Tab

le4.

Outw

ard

Tra

nsm

issi

onof

Des

tinat

ion-C

ountr

yP

ruden

tial

Pol

icy

Sec

tor-

Res

erve

Res

erve

Cap

ital

Spec

ific

Loan

-to-

Req

uir

e-R

equir

e-In

terb

ank

Pru

den

tial

Req

uir

e-C

apit

alV

alue

men

ts:

men

ts:

Exposu

reIn

dex

Cm

ents

Buffer

Rat

ioFore

ign

Loca

lLim

its

(1)

(2)

(3)

(4)

(5)

(6)

(7)

Pt

0.00

5−

0.00

8−

0.00

20.

012

−0.

005

0.00

6−

0.00

2(0

.006

)(0

.014

)(0

.010

)(0

.010

)(0

.005

)(0

.009

)(0

.018

)P

t−1

0.00

7−

0.00

9−

0.00

3−

0.01

5∗0.

001

0.01

1−

0.03

7∗∗

(0.0

05)

(0.0

13)

(0.0

09)

(0.0

09)

(0.0

11)

(0.0

08)

(0.0

18)

Pt−

20.

009∗

−0.

014

0.01

30.

016∗

0.00

20.

007

0.01

3(0

.005

)(0

.011

)(0

.014

)(0

.010

)(0

.005

)(0

.006

)(0

.012

)Log

Tot

alA

sset

s t−

1−

0.00

6−

0.00

6−

0.00

6−

0.00

6−

0.00

6−

0.00

6−

0.00

6(0

.007

)(0

.008

)(0

.008

)(0

.008

)(0

.008

)(0

.007

)(0

.008

)T

ier

1R

atio

t−1

0.00

10.

001

0.00

10.

001

0.00

10.

001

0.00

1(0

.001

)(0

.001

)(0

.001

)(0

.001

)(0

.001

)(0

.001

)(0

.001

)Illiq

uid

Ass

ets

Rat

iot−

10.

001∗

∗0.

001∗

∗0.

001∗

∗0.

001∗

∗0.

001∗

∗0.

001∗

∗0.

001∗

(0.0

00)

(0.0

00)

(0.0

00)

(0.0

01)

(0.0

00)

(0.0

00)

(0.0

00)

Inte

rnat

iona

lA

ctiv

ity t

−1

−0.

002∗

∗∗−

0.00

2∗∗∗

−0.

002∗

∗∗−

0.00

2∗∗∗

−0.

002∗

∗∗−

0.00

2∗∗∗

−0.

002∗

∗∗

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

01)

Net

Due

To t

−1

0.00

2∗0.

002∗

0.00

2∗0.

002∗

0.00

2∗0.

002∗

0.00

2∗

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

01)

(con

tinu

ed)

Page 28: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

462 International Journal of Central Banking March 2017

Tab

le4.

(Con

tinued

)

Sec

tor-

Res

erve

Res

erve

Cap

ital

Spec

ific

Loan

-to-

Req

uir

e-R

equir

e-In

terb

ank

Pru

den

tial

Req

uir

e-C

apit

alV

alue

men

ts:

men

ts:

Exposu

reIn

dex

Cm

ents

Buffer

Rat

ioFore

ign

Loca

lLim

its

(1)

(2)

(3)

(4)

(5)

(6)

(7)

Cor

eD

epos

its

Rat

iot−

1−

0.00

1∗∗∗

−0.

001∗

∗∗−

0.00

1∗∗∗

−0.

001∗

∗∗−

0.00

1∗∗∗

−0.

001∗

∗∗−

0.00

1∗∗∗

(0.0

00)

(0.0

00)

(0.0

00)

(0.0

00)

(0.0

00)

(0.0

00)

(0.0

00)

BIS

Fin

anci

alC

ycle

t0.

000∗

∗0.

000∗

∗0.

000∗

∗0.

000∗

∗0.

000∗

∗0.

000∗

∗0.

000∗

(0.0

00)

(0.0

00)

(0.0

00)

(0.0

00)

(0.0

00)

(0.0

00)

(0.0

00)

BIS

Bus

ines

sC

ycle

t0.

003

0.00

40.

004

0.00

40.

004

0.00

40.

004

(0.0

02)

(0.0

02)

(0.0

03)

(0.0

03)

(0.0

03)

(0.0

03)

(0.0

02)

Obs

erva

tion

s25

,986

25,9

8625

,986

25,9

8625

,986

25,9

8625

,986

R2

0.02

30.

022

0.02

30.

023

0.02

20.

023

0.02

3A

djus

ted

R2

0.01

60.

016

0.01

60.

016

0.01

60.

016

0.01

6

Des

tP(t

)C

oeffi

cien

tSu

m0.

021∗

−0.

030

0.00

80.

013

−0.

002

0.02

3−

0.02

6p-

valu

e[0

.091

][0

.266

][0

.669

][0

.243

][0

.917

][0

.150

][0

.427

]

Note

s:T

his

table

repor

tsth

eeff

ects

ofch

ange

sin

des

tinat

ion-c

ount

ryre

gula

tion

and

firm

char

acte

rist

ics

onlo

gch

ange

sin

tota

llo

ans

bydes

tinat

ion

count

ry.T

he

dat

aar

equ

arte

rly

from

2000

:Q1

to20

13:Q

3fo

ra

pan

elof

ban

khol

din

gco

mpan

ies.

Des

tPre

fers

toth

ech

ange

sin

regu

lati

onin

the

des

tinat

ion

count

ryof

the

loan

.For

mor

edet

ails

onth

eva

riab

les,

see

table

7in

the

appen

dix

.Eac

hco

lum

ngi

ves

the

resu

ltfo

rth

ere

gula

tory

mea

sure

spec

ified

inth

eco

lum

nhea

dline.

All

spec

ifica

tion

sin

clude

fixe

deff

ects

assp

ecifi

edin

the

low

erpar

tof

the

table

.Sta

ndar

der

rors

are

clust

ered

byco

unt

ry.**

*,**

,an

d*

indic

ate

sign

ifica

nce

atth

e1

per

cent

,5

per

cent

,an

d10

per

cent

leve

l,re

spec

tive

ly.

Page 29: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

Vol. 13 No. S1 Lessons from the United States 463

related to the stricter regulation mandated by the Dodd-Frank Actand the Basel standards on capital regulation, in particular theBasel II.5 standards implemented in January 2013 and the Basel IIIstandards that became effective in January 2014. These regulatorychanges are captured in the IBRN Prudential Instruments Databasein the capital requirements index. Since our sample ends in 2013:Q3,only the implementation of Basel II.5 can be captured in our empiri-cal analysis. Given this setting, we use the cumulative change in thecapital requirement index for the United States as the variable ofinterest. This indicator is equal to one from the first quarter in 2013until the end of the sample, and zero otherwise. This approach makesthe empirical test a de facto difference-in-difference estimation. Moreformally, we use the following regression specification:

ΔYb,j,t = α0 + α1UScum CapReqt + α2Xb,t−1

+ α3UScum CapReqt ∗ Xb,t−1 + α4Zj,t

+ fj + fb + εb,j,t, (4)

where the prudential instrument is captured by UScum CapReqt,which records the cumulative changes in U.S. capital requirements.We also include interaction terms between this instrument and somebank characteristics in vector Xb,t−1 to complete the difference-in-difference analysis. As before, the dependent variable is the changein logs of U.S. bank b’s claims on country j at time t evaluatedon an ultimate risk basis. In this specification, the U.S. prudentialinstrument varies only by time and thus we only include bank andcountry fixed effects. We also use specifications that include country-time fixed effects to account for loan demand at the country level. Inthese cases, UScum CapReqt is absorbed by the country-time fixedeffect and thus we focus our attention only on the interaction ofUScum CapReqt and bank-specific characteristics.

Most of the recent regulatory changes in the United States havefocused on the systemic global banks which are subject to the FederalReserve’s stress tests, known as the Comprehensive Capital Analysisand Review (CCAR) and, among these banks, those that follow theso-called Advanced Approach capital rules.21 Therefore, we test for

21CCAR BHCs are generally global U.S. BHCs with total consolidated assetsabove $50 billion. As of 2013:Q3, there were thirty CCAR BHCs, twenty-three

Page 30: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

464 International Journal of Central Banking March 2017

a differential impact of the stricter U.S. regulation on the growth intotal and cross-border claims for CCAR/non-CCAR and AdvancedApproach/non-Advanced Approach banks. To this end, we includeinteractions between UScum CapReqt and dummy variables that takethe value of one for CCAR or Advanced Approach banks and zerootherwise. We expect that if there is any negative effect of the newcapital regulations on the growth in foreign bank claims, it shouldbe significant for the group of large global banks.22

This expectation is supported by the results presented in table5. The first four columns of the table examine the changes in totalclaims and cross-border claims to all countries. Columns 5–8 exam-ine the changes in cross-border claims to advanced foreign andemerging economies. In almost all cases, the interaction of UScum

CapReqt and indicator variables for CCAR and Advanced Approachbanks is negative and significant. This finding confirms that the newBasel capital regulations reduced the growth in foreign claims at thelargest U.S. banks subject to the Federal Reserve’s stress tests com-pared with smaller institutions not subject to these stress tests. Forexample, taking into account that the difference in growth ratesbetween CCAR and non-CCAR banks before 2013 was on average0.4 percentage points (the growth rate was 1 percent for CCARbanks and 0.6 percent for non-CCAR banks), our estimates indicatethat the difference in growth rates between the two groups of banksand across the two periods should have been –5.5 percentage points(the difference-in-difference estimate). The growth rate differentialobserved in the data is –5.2 percentage points. Thus, most of thereduction in the growth rate of CCAR banks relative to non-CCARbanks could be attributable to the change in U.S. capital regulationfollowing the implementation of Basel II.5.

We explore further whether the negative impact of the strictercapital regulation is influenced by bank-specific characteristics. Tothat end, we include interaction terms between the cumulativecapital requirements index and three bank-specific characteristics:

of which had foreign claims in the fifty-nine countries in our sample. AdvancedApproach BHCs are CCAR BHCs with total assets above $250 billion and foreignexposures larger than $10 billion.

22Our estimates likely provide a lower bound to the total effects of regulatorychanges, as the banks may have adapted their portfolios as early as 2011.

Page 31: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

Vol. 13 No. S1 Lessons from the United States 465

Tab

le5.

Impac

tof

Chan

ges

inU

.S.C

apital

Reg

ula

tion

onFor

eign

Cla

imG

row

thby

Type

ofC

laim

and

Des

tinat

ion

Cou

ntr

y

Adva

nce

dFore

ign

All

Countr

ies

Countr

ies

Em

ergin

gM

arket

s

Tota

lC

laim

sC

ross

-Bord

erC

laim

sC

ross

-Bord

erC

laim

sC

ross

-Bord

erC

laim

s

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

US c

um

Cap

Req

t*C

CA

Rt

−0.

055∗

∗∗−

0.07

4∗∗∗

−0.

078∗

∗−

0.07

2∗∗∗

(0.0

12)

(0.0

18)

(0.0

33)

(0.0

19)

US c

um

Cap

Req

t*−

0.04

8∗∗∗

−0.

046∗

∗−

0.04

2−

0.05

3∗∗

Adv

ance

dA

ppro

ach t

(0.0

14)

(0.0

19)

(0.0

28)

(0.0

20)

Log

Tot

alA

sset

s t−

1−

0.00

6−

0.00

3−

0.00

7−

0.00

4−

0.01

4−

0.01

20.

003

0.00

5(0

.011

)(0

.011

)(0

.011

)(0

.011

)(0

.015

)(0

.015

)(0

.016

)(0

.016

)T

ier

1R

atio

t−1

0.00

3∗∗

0.00

3∗∗

0.00

3∗∗

0.00

3∗∗

0.00

5∗∗∗

0.00

5∗∗∗

0.00

10.

001

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

02)

(0.0

02)

(0.0

02)

(0.0

02)

Illiq

uid

Ass

ets

Rat

iot−

10.

001∗

0.00

1∗0.

001

0.00

10.

002∗

∗0.

002∗

∗.0

001

.000

1(0

.000

)(0

.000

)(0

.001

)(0

.001

)(0

.001

)(0

.001

)(0

.001

)(0

.001

)In

tern

atio

nalA

ctiv

ity t

−1

−0.

002∗

∗∗−

0.00

2∗∗∗

−0.

002∗

∗∗−

0.00

2∗∗∗

−0.

003∗

∗∗−

0.00

3∗∗∗

−0.

001∗

−0.

001∗

(0.0

01)

(0.0

01)

(0.0

00)

(0.0

00)

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

01)

Net

Due

To t

−1

0.00

20.

002

0.00

20.

002

0.00

30.

003

0.00

50.

005

(0.0

02)

(0.0

02)

(0.0

03)

(0.0

03)

(0.0

02)

(0.0

02)

(0.0

19)

(0.0

19)

Cor

eD

epos

its

Rat

iot−

1−

0.00

3−

0.00

4−

0.00

1−

0.00

1−

0.00

1∗−

0.00

2∗−

0.00

4−

0.00

1(0

.001

)(0

.001

)(0

.001

)(0

.001

)(0

.001

)(0

.001

)(0

.001

)(0

.001

)

Obs

erva

tion

s35

,483

35,4

8331

,114

31,1

1414

,809

14,8

0916

,305

16,3

05R

20.

120.

120.

130.

130.

10.

10.

150.

15A

djus

ted

R2

0.03

0.03

0.03

0.03

0.02

0.02

0.04

0.04

Cou

ntry

-Tim

eFix

edE

ffec

tsYes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Note

s:T

his

table

repor

tsth

eeff

ects

ofch

ange

sin

the

inte

ract

ion

ofch

ange

sin

U.S

.pru

den

tial

pol

icy

wit

hin

dic

ator

vari

able

sfo

rC

CA

Ror

Adva

nce

dA

ppro

ach

ban

ksan

dfirm

char

acte

rist

ics

onlo

gch

ange

sin

tota

llo

ans

bydes

tinat

ion

count

ry.

CC

AR

ban

ksar

eban

khol

din

gco

mpan

ies

(BH

Cs)

incl

uded

inth

eye

arly

stre

ss-t

est

exer

cise

conduct

edby

the

Fed

eral

Res

erve

.A

dva

nce

dA

ppro

ach

ban

ksar

eC

CA

RB

HC

sw

ith

tota

las

sets

abov

e$2

50billion

and

fore

ign

expos

ure

sla

rger

than

$10

billion

.T

he

dat

aar

equ

arte

rly

from

2000

:Q1

to20

13:Q

3fo

ra

pan

elof

BH

Cs.

For

mor

edet

ails

onth

eva

riab

les,

see

table

7in

the

appen

dix

.Eac

hco

lum

ngi

ves

the

resu

ltfo

rth

eco

unt

ryan

dcl

aim

type

spec

ified

inth

eco

lum

nhea

der

.Spec

ifica

tion

sin

allco

lum

ns

incl

ude

ban

kan

dco

unt

ry-t

ime

fixe

deff

ects

.Sta

ndar

der

rors

are

clust

ered

byban

k.**

*,**

,an

d*

indic

ate

sign

ifica

nce

atth

e1

per

cent

,5

per

cent

,an

d10

per

cent

leve

l,re

spec

tive

ly.

Page 32: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

466 International Journal of Central Banking March 2017

size, the tier 1 capital ratio, and the core-deposits-to-total-liabilitiesratio.23 Table 6 shows the regression results. The estimations in thefirst two columns include US cum CapReqt as a stand-alone vari-able and separate country, time, and bank fixed effects. The changein U.S. capital regulation seems to reduce the growth in foreignclaim of U.S. global banks, as suggested by the negative coeffi-cient on US cum CapReqt, but this effect is not statistically signif-icant. However, balance sheet characteristics appear important toexplain bank reactions to the change in capital requirements, asindicated by the three significant interaction terms between US cum

CapReqt and size, tier 1 capital ratio, and the core-deposit-to-total-liabilities ratio in column 2. For example, the negative impact of thestricter regulation is stronger for larger banks; in contrast, bankswith more capital (tier 1 capital ratio) and core deposits are able toincrease their claims after the new regulations are implemented. Col-umn 3 shows that the significance of the interaction terms betweenUS cum CapReqt and size and core deposits is robust to account-ing for the foreign demand for credit through country-time fixedeffects.

To better control for the effect of bank size, and to verifythat the impact of the new regulations on foreign claims occursmainly through the largest global banks, we estimate the same spec-ifications, splitting our sample by CCAR and non-CCAR banksand by Advanced Approach and non-Advanced Approach banks.These results are shown in columns 4–7. As expected, the coeffi-cients on the interaction terms are mostly significant for CCARand Advanced Approach banks. The interaction terms with coredeposits for Advanced Approach banks, and with both tier 1 cap-ital and the core deposits ratio for CCAR banks, are positive andsignificant, indicating that large banks with more regulatory cap-ital and core deposits are able to offset the impact of the strictercapital regulation. Recent evidence shows that large U.S. banks sub-ject to the stress tests have been increasing their regulatory capitaland their deposits base (International Monetary Fund 2015). Our

23These three interaction terms have the only significant coefficients in thespecifications that include interactions between the cumulative changes in theU.S. capital requirements and all bank characteristics.

Page 33: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

Vol. 13 No. S1 Lessons from the United States 467

Tab

le6.

Impac

tof

Chan

ges

inU

.S.C

apital

Reg

ula

tion

onTot

alFor

eign

Cla

imG

row

th

Adv.

Non-A

dv.

CC

AR

Non-C

CA

RA

ppro

ach

Appro

ach

All

Banks

Banks

Banks

Banks

Banks

(1)

(2)

(3)

(4)

(5)

(6)

(7)

UScum

CapR

eqt

−0.0

05

0.0

57

(0.0

09)

(0.0

82)

UScum

CapR

eqt*Log

−0.0

06

∗∗

−0.0

08

∗∗

−0.0

06

0.0

08

−0.0

11

−0.0

03

Tota

lA

sset

s t−

1(0

.003)

(0.0

03)

(0.0

06)

(0.0

07)

(0.0

08)

(0.0

04)

UScum

CapR

eqt*T

ier

1R

ati

ot−

10.0

05

∗∗

0.0

03

0.0

07

∗−

0.0

04

0.0

07

.0002

(0.0

02)

(0.0

02)

(0.0

03)

(0.0

03)

(0.0

04)

(0.0

03)

UScum

CapR

eqt*C

ore

0.0

01

∗∗

∗0.0

01

∗∗

0.0

01

∗∗

.0001

0.0

01

∗∗

.0001

Dep

osi

tsR

ati

ot−

1(0

.000)

(0.0

00)

(0.0

00)

(0.0

01)

(0.0

00)

(0.0

01)

Log

Tota

lA

sset

s t−

1−

0.0

14

−0.0

16

−0.0

08

−0.0

12

0.0

2−

0.0

35

0.0

08

(0.0

13)

(0.0

14)

(0.0

11)

(0.0

12)

(0.0

24)

(0.0

24)

(0.0

17)

Tie

r1

Rati

ot−

10.0

03

∗0.0

02

0.0

02

0.0

01

0.0

03

∗0.0

05

0.0

01

(0.0

02)

(0.0

02)

(0.0

01)

(0.0

03)

(0.0

02)

(0.0

04)

(0.0

02)

Illiquid

Ass

ets

Rati

ot−

10.0

01

∗∗

0.0

01

∗∗

0.0

01

0.0

01

0.0

01

0.0

01

0.0

01

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

01)

Inte

rnati

onalA

ctiv

ityt−

1−

0.0

02

∗∗

∗−

0.0

02

∗∗

∗−

0.0

02

∗∗

∗−

0.0

02

∗∗

∗−

0.0

02

∗∗

∗−

0.0

03

∗∗

−0.0

02

(0.0

01)

(0.0

01)

(0.0

00)

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

01)

Net

Due

Tot−

10.0

01

0.0

01

0.0

02

0.0

02

0.0

04

0.0

01

0.0

04

(0.0

02)

(0.0

02)

(0.0

02)

(0.0

02)

(0.0

03)

(0.0

02)

(0.0

02)

Core

Dep

osi

tsR

ati

ot−

1−

.0004

−0.0

01

−0.0

01

−0.0

01

.0002

−0.0

01

−0.0

01

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

01)

(0.0

01)

BIS

Fin

anci

alC

ycl

e t0.0

03

∗∗

∗0.0

04

∗∗

(0.0

01)

(0.0

01)

BIS

Busi

nes

sC

ycl

e t.0

002

.0001

(0.0

00)

(0.0

00)

Obse

rvati

ons

31,7

33

28,4

64

31,8

57

21,9

81

9,8

76

17,0

71

14,7

86

R2

0.0

10.0

10.1

30.1

80.3

0.2

20.2

2A

dju

sted

R2

0.0

05

0.0

10.0

40.0

50.0

30.0

50.0

3

Countr

y-T

ime

Fix

edEffec

tsN

oN

oYes

Yes

Yes

Yes

Yes

Note

s:

This

table

report

sth

eeffects

of

changes

inU

.S.pru

denti

alpolicy,th

ein

tera

cti

on

of

changes

inU

.S.pru

denti

alpolicy

wit

hch

anges

indest

inati

on-c

ountr

yre

gula

tion,and

firm

chara

cte

rist

ics

on

log

changes

into

tallo

ans

by

dest

inati

on

countr

y.T

he

data

are

quart

erl

yfr

om

2000:Q

1to

2013:Q

3fo

ra

panelofbank

hold

ing

com

panie

s.For

more

deta

ils

on

the

vari

able

s,se

eta

ble

7in

the

appendix

.Each

colu

mn

giv

es

the

resu

ltfo

rth

esu

bse

tofbanks

specifie

din

the

colu

mn

hea

der.

CC

AR

banks

are

BH

Cs

inclu

ded

inth

eyearl

yst

ress

-test

exerc

ise

conducte

dby

the

Federa

lR

ese

rve.A

dvanced

Appro

ach

banks

are

CC

AR

BH

Cs

wit

hto

talass

ets

above

$250

billion

and

fore

ign

exposu

res

larg

er

than

$10

billion.Specific

ati

ons

inall

colu

mns

inclu

de

bank

fixed

effects

,w

ith

the

firs

ttw

ocolu

mns

inclu

din

gcountr

yfixed

effects

.C

ountr

y-t

ime

fixed

effects

are

use

das

indic

ate

din

the

lower

part

ofth

eta

ble

.Sta

ndard

err

ors

are

clu

stere

dby

bank.***,**,and

*in

dic

ate

signific

ance

at

the

1perc

ent,

5perc

ent,

and

10

perc

ent

level,

resp

ecti

vely

.

Page 34: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

468 International Journal of Central Banking March 2017

results indicate that this trend may help them withstand the tougherregulations.

These results are consistent with previous findings in the lit-erature suggesting a reduction in cross-border activities caused bystricter prudential policies (e.g., Aiyar et al. 2014). This is espe-cially the case for the largest global banks subject to higher capitalrequirements that apply to the consolidated entity.

4. Concluding Remarks

The 2007–08 financial crisis has led many countries around the worldto review their use of microprudential and macroprudential policyinstruments. In a financially integrated world in which banks areglobal and run large cross-border operations, two questions natu-rally arise. First, have prudential policies taken by national regula-tors affected risk taking and credit growth beyond national borders?Second, can domestic prudential policies be effective in containingrapid domestic credit growth and addressing excessive risk taking?The U.S. experience is useful since the country is home to a numberof globally active banks, many of which are systemically important,and simultaneously hosts many foreign banks engaged in lending inthe United States through both subsidiaries and branches. We focusprimarily on the response of credit growth through these bankingentities.

We find clear evidence that lending in the United States isaffected by foreign policy changes. A tightening of foreign prudentialinstruments leads to an increase in U.S. lending by both domesti-cally owned global banks with significant foreign operations and bythe U.S. affiliates of foreign banks. Specifically, lending growth riseswith tighter foreign capital requirements, limits on LTV ratios, andlocal-currency reserve requirements enacted in foreign economies.The capacity of foreign and U.S. global banks to lend appears toshift, at least in part, from the foreign countries, where it is beingconstrained, to the United States.

We also find that the largest U.S. global banks, those that aredeemed systemic and thus have been required to finance a largerproportion of their balance sheets with capital, appear to cut creditabroad relatively more than the smaller banks in response to tightercapital requirements in the United States. Although the intent of

Page 35: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

Vol. 13 No. S1 Lessons from the United States 469

these capital requirements was not to reduce the supply of credit,the short-term effect points to lower foreign claims growth as a resultof the stricter requirements. In contrast, we find that the use of pru-dential instruments by foreign authorities does not have a significantimpact on the activities of U.S. banks in those foreign countries.

While the international spillovers from past prudential policytightening were moderate, our results highlight the challenges thatpolicymakers face today. Effective control of domestic credit can becomplicated by the prudential policies implemented in foreign juris-dictions. At the same time, calibration of domestic policies will needto take into account the spillovers of prudential policy changes inforeign countries and their cross-border effects. Despite limited realconsequences for the U.S. economy over the past decade, prudentialinstruments applied abroad have the potential to more significantlyinfluence loan growth in the future through a variety of bankingchannels.

Page 36: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

470 International Journal of Central Banking March 2017A

ppen

dix

Tab

le7.

Con

stru

cton

ofB

alan

ceShee

tV

aria

ble

s

U.S

.B

ranch

es

of

Report

Form

Outw

ard

/In

ward

—U

.S.

U.S

Subsi

dia

ries

of

Fore

ign

Banks:

Vari

able

Nam

eD

esc

ripti

on

Glo

balB

anks:

Sourc

eFore

ign

Banks:

Sourc

eSourc

eN

ote

s

ΔY

Outw

ard

:lo

g(T

ota

lC

laim

s t)

–lo

g(T

ota

lC

laim

s t−

1)

Inw

ard

:lo

g(T

ota

lLoans t

)–

log(T

ota

lLoans t

−1)

FFIE

C009

FC

EX

C918,C

919,

C920,C

922,8593,

8577,8578,8579,

C915,C

916,C

917

FR

Y-9

C,FFIE

C031

BH

CK

and

RC

FD

2122

FFIE

C002

RC

FD

2122

Illiquid

Ass

ets

Rati

o{(

Loans

hel

dfo

rsa

le+

Loans

net

of

unea

rned

inco

me

and

allow

ance

sfo

rlo

an

and

lease

loss

es(A

.L.L

.)+

Hel

d-t

o-

matu

rity

MB

S,A

BS,

and

stru

cture

dfinanci

alpro

duct

s(a

mort

ized

cost

)+

Ava

ilable

-for-

sale

MB

S,A

BS,and

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Page 37: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

Vol. 13 No. S1 Lessons from the United States 471Tab

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Page 38: International Banking and Cross-Border Effects of …International Banking and Cross-Border Effects of Regulation: Lessons from the United States∗ Jose M. Berrospide, aRicardo Correa,

472 International Journal of Central Banking March 2017

Table 8. Additional Results on the Effectof Capital Requirements: Split between Domestic and

Foreign Lending

Capital Requirements

All Loans Domestic Foreign(1) (2) (3)

Pt 0.036∗∗ 0.030 0.202∗

(0.018) (0.020 (0.115)Log Total Assetst−1 −0.066∗∗∗ −0.077∗∗∗ −0.092

(0.015) (0.019) (0.060)Tier 1 Ratiot−1 0.002∗∗ 0.001 −0.003

(0.001) (0.002) (0.005)Illiquid Assets Ratiot−1 −0.000 −0.000 0.001

(0.000) (0.001) (0.001)Net Due Tot−1 −0.003 0.012 −0.008∗∗

(0.003) (0.017) (0.004)Core Deposits Ratiot−1 0.001 −0.000 0.000

(0.000) (0.001) (0.003)BIS Financial Cyclet −0.001∗∗ −0.001∗ 0.001

(0.000) (0.001) (0.003)BIS Business Cyclet 0.000 0.002 −0.003

(0.003) (0.009) (0.018)International Activityt−1 0.001∗ 0.000 −0.001

(0.001) (0.001) (0.002)

Observations 1,873 1,871 1,778R2 0.196 0.126 0.101Adjusted R2 0.141 0.067 0.037No. of Banks 59 59 58Proportion of Pt Non-zero 0.145 0.145 0.151

Notes: This table reports the effects of changes in capital requirements, splittingtotal loans into loans to U.S. (column 2) and foreign (column 3) residents. The sampleperiod is 2000:Q1 to 2013:Q3. All specifications include time and bank fixed effects.Standard errors are robust for global banks. ***, **, and * indicate significance atthe 1 percent, 5 percent, and 10 percent level, respectively.

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Vol. 13 No. S1 Lessons from the United States 473

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