Cross-border regulatory spillovers and macroprudential policy coordination

Pierre-Richard Agénor, Timothy P. Jackson and Luiz Awazu Pereira da Silva ()

Journal of Monetary Economics, 2024, vol. 146, issue C

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.

Keywords: Regulatory spillovers; Macroprudential policy; Cooperation (search for similar items in EconPapers)
JEL-codes: E58 F42 F62 (search for similar items in EconPapers)
Date: 2024
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Related works:
Working Paper: Cross-border regulatory spillovers and macroprudential policy coordination (2022)
Working Paper: Cross-Border Regulatory Spillovers and Macroprudential Policy Coordination (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:146:y:2024:i:c:s0304393224000357

DOI: 10.1016/j.jmoneco.2024.103582

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