Cross-border Banking and the Circumvention of Macroprudential and Capital Control Measures
IMF Working Papers, September 28, 2018
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- Cross-border Banking and the Circumvention of Macroprudential and Capital Control Measures
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Bibliographic details
- Authors: Eugenio M Cerutti, Haonan Zhou
- Published: September 28, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484378328.001
Summary and research objective
- Analyze the joint impact of macroprudential and capital control measures on cross-border banking flows.
- Control for multidimensional aspects in lender-and-borrower relationships (e.g., distance, cultural proximity, microprudential regulations).
- Focus on identifying spillover effects and circumvention or arbitrage incentives.
Key empirical findings
- Lender-country macroprudential policies:
- Reduce direct cross-border banking outflows.
- Are associated with larger outflows through local affiliates (affiliate lending), indicating circumvention or arbitrage.
- Borrower-country macroprudential policies:
- Are associated with higher direct cross-border inflows, linked to circumvention motives.
- Capital controls:
- Most spillovers from capital controls appear to operate through local affiliates rather than direct cross-border channels.
- Interaction between capital inflow controls and macroprudential policies:
- No evidence that additional capital inflow controls interact with macroprudential policies to mitigate cross-border spillovers.
Thematic analysis and mechanisms
- Circumvention and arbitrage:
- Many observed spillover patterns are most likely associated with circumvention or arbitrage incentives by banks operating across borders.
- Channels of transmission:
- Distinction between direct cross-border flows and flows routed through local affiliates is central to understanding spillovers.
- Local affiliates serve as a prominent channel for spillovers from both macroprudential measures and capital controls.
Policy implications and considerations
- Policymakers should account for migration of activity to local affiliates when designing macroprudential and capital control measures.
- Reliance solely on additional capital inflow controls is unlikely to neutralize cross-border spillovers caused by macroprudential measures.
- Cross-border coordination and attention to affiliate-based channels may be necessary to reduce circumvention and unintended spillovers.
Keywords and subjects emphasized
- Subject: Balance of payments; Bank credit; Banking; Capital controls; Cross-border banking; Financial sector policy and analysis; Financial services; Macroprudential policy; Macroprudential policy instruments; Money
- Keywords: affiliate lending; Bank credit; banking flow; borrower country; borrowers' MPM; Capital Controls; Cross-border banking; Cross-Border Banking Flows; Global; inflow restriction; lender-borrower level; Macroprudential Policies; Macroprudential policy; Macroprudential policy instruments; MPM spillover; MPM usage; WP
IMF Working Paper No. 2018/217 by Eugenio M Cerutti and Haonan Zhou