Macroprudential policies and global banking

Doriane, Intungane

Macroprudential policies and global banking

Author

Doriane, Intungane

Date

2024

Keywords

macroprudential policy, international, banking system, systemic risks, policy complementarity

Abstract (summary)

This paper examines the ability of macroprudential policies to dampen the pro-cyclicality of credit market cycles and to enhance the macroeconomic stability in countries open to cross-border banking activities. For the analysis, we develop a two-country dynamic stochastic general equilibrium model with collateral constrained investors and global banks. The existence of cross-border lending activities is the source of the transmission of shocks across countries. The macroprudential policies analyzed are loan-to-value ratios and capital requirements, also known as the capital adequacy ratio, which are formulated as Taylor-type rules. Our results show that the effectiveness of capital requirement financial regulations is undermined if borrowers can increase credit from foreign banks originating from a country with more relaxed financial restrictions. When cross-border lending is permitted, national financial regulators can improve the financial stability of credit growth and management of credit by complementing the capital adequacy ratios with loan-to-value ratios.