The Cross Border Effects of Bank Capital Regulation in General Equilibrium

Maximiliano San Millán

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: We examine the cross-border effects of bank capital requirements using a two-country DSGE model with financial frictions, calibrated to match Euro Area banking flows. Regulation follows a host country principle, applying uniformly to all bank exposures within a country, regardless of the banks' nationality. We find that increasing capital requirements in one country leads to a short run credit contraction in interconnected countries. However, long run credit spillovers are negligible. Instead, we find positive long run welfare spillovers, primarily due to higher bank dividend payouts to foreign bank owners, rather than increased financial stability in the foreign country.

Date: 2025-06
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:1046

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