International banking and macroprudential spillovers
IBRN-IMF conference on The Transmission of Macroprudential and
Monetary Policies Across Borders, Washington DC, April 19 2017
Olivier JEANNE
Johns Hopkins University
Peterson Institute, NBER and CEPR
Introduction
• Should the international policy spillovers from
macroprudential policies be a source of
concern?
• Should these concerns be addressed by
international coordination?
• The IBRN has produced new evidence about
international spillovers from macroprudential
policy (Buch and Goldberg, 2016)
• I will give a theoretical perspective on these
questions
Evidence from the IBRN
• Impact of an increase in the capital
requirement (CR) in country A on bank lending
in country B?
A
Real sector
Banks
B
Real sector
Banks
Evidence from the IBRN
Table 1. Impact of increase in general CR in
country A on bank lending in country B
(based on Buch and Goldberg, 2016, Table 4)
No effect Positive
effect
Number of
237
42
regressions
(79%)
(14%)
Negative
effect
21
(7%)
Evidence from the IBRN
Bottom line:
• international macroprudential policy spillovers
are detectable but they are not pervasive and
quantitatively not very large
• the spillovers depend on the structure and
balance sheets of individual banks
(heterogeneity)
Interpretation and policy implications?
Efficient vs. inefficient spillovers
• Are the spillovers from macroprudential policy
problematic?
• The policy spillovers are efficient if a global
social planner cannot improve the policy
configuration that arises when the countries
do not coordinate
– no Pareto gain from international policy
coordination
Efficient vs. inefficient spillovers
A case with efficient spillovers (Jeanne, 2014;
Korinek, 2016)
A
Borrowers
taxA
Savers
B
Borrowers
taxB
Savers
Efficient vs. inefficient spillovers
A case with inefficient spillovers (Bengui, 2014;
Kara, 2016)
B
Borrowers
C
A
Banks
Borrowers
Banks
taxB
Borrowers
Banks
taxA
taxC
Wholesale funding
Efficient vs. inefficient spillovers
Other cases of inefficient spillovers:
• international contagion arising from fire sales
of a collateral asset in a global market
• countries sharing the costs of the safety nets
but not regulation
• countries having a limited ability to deal with
large capital inflows (Rajan, 2014)
Efficient vs. inefficient spillovers
Korinek (2016) shows the following result:
• if each systemic externality is addressed by a
regulatory authority with the appropriate
jurisdiction and instruments, then the
international policy spillovers are efficient
Strong assumption, many possible deviations
Differential diagnosis
• Whether an international spillover is
problematic depends on the context
• It can be determined based on a differential
diagnosis taking into account policy targets
and instruments
• The diagnosis should start from a clear
identification of the target of macroprudential
policy
Differential diagnosis
• For example, is the problem overlending by banks, or
overborrowing by the real sector?
– distinct problems (Mian and Sufi, 2013; Farhi and Werning,
2016)
– the reach of macroprudential policy limited to banking
sector but the targets may be in the real sector (Jeanne
and Korinek, 2014)
• One needs a clear allocation of policy instruments to
targets
• Spillovers are more likely to be problematic when
policy instruments are misused, misallocated or
missing
Differential diagnosis
• Example 1: higher capital requirement lead local
banks to lend less abroad, as shown by Ayar et al
(2014a) for the UK
• Efficient or inefficient spillover?
• This depends on the policy objective: rein in
excessive lending by UK banks or excessive bank
lending in the UK?
• Do macroprudential authorities tend to be
“careless neighbors”?
Differential diagnosis
• Example 2: Mortgage borrowers shift to
branches of foreign banks after an increase in
the LTV ratio on mortgages (Aiyar et al, 2014b)
• Efficient or inefficient spillover?
• This depends on the policy objective: reduce
the exposure of local banks to real estate risk
or reduce the leverage of UK mortgage
borrowers
Differential diagnosis
• General problem: a given macroprudential
instrument may have to be set by different
national authorities depending on the policy
objective
• How can the allocation of instruments be
made contingent on the objectives of policy?
• Reciprocity a la carte (ESRB in the EU) ?
Differential diagnosis
• Should we worry more about spillovers from
existing policy instruments or spillovers from
missing policy instruments?
• Example 1: shadow banking (Bruno and Shin,
2016)
– macroprudential policy that makes systemic risk
migrate out of the banking sector can have inefficient
international spillovers
• Example 2: wholesale funding market in dollar
– who is in charge of the systemic risk generated by this
market?
Conclusion
• Efficient vs. inefficient policy spillovers
• Need for differential diagnosis that takes into
account the targets and instruments of policy
– more research needed to identify and study relevant
cases
• Most worrying spillovers might come from global
systemic risk unaddressed by existing policies
(rather than spillovers from existing policies)