Cross-border regulatory spillovers and macroprudential policy coordination

Agénor, Pierre-Richard, Jackson, Timothy P ORCID: 0000-0002-6142-8882 and Pereira da Silva, Luiz A (2024) Cross-border regulatory spillovers and macroprudential policy coordination. Journal of Monetary Economics. p. 103582.

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Official URL: http://dx.doi.org/10.1016/j.jmoneco.2024.103582

Abstract

We develop a core–periphery model with financial frictions and cross-border banking to assess the magnitude of regulatory spillovers and the gains from macroprudential policy coordination. A core global bank lends to its affiliates in the periphery and banks in both regions are subject to risk-sensitive capital regulation. Following an expansionary monetary policy in the core, a countercyclical response in capital requirements in that region induces the global bank to increase cross-border lending. We calculate welfare gains associated with countercyclical capital buffers under a range of policy regimes, including independent policymaking, full coordination, and reciprocity—a regime in which capital ratios set in the core are imposed on the global bank's affiliates abroad. One of our key results is that, even when regulatory spillovers are strong, reciprocity can make all parties better off if regulators attach a sufficient weight to financial stability considerations. With a standard, utility-based welfare criterion, reciprocity may also perform better than independent policymaking when regulatory spillovers are weak.

Item Type:	Article
Uncontrolled Keywords:	Prevention, 10 Reduced Inequalities
Divisions:	Faculty of Humanities and Social Sciences > School of Management
Depositing User:	Symplectic Admin
Date Deposited:	02 Apr 2024 16:16
Last Modified:	29 Apr 2024 17:16
DOI:	10.1016/j.jmoneco.2024.103582
Related URLs:	Publisher
URI:	https://livrepository.liverpool.ac.uk/id/eprint/3180003