The Bank of England just released a paper which examines whether cross-border spillovers of macroprudential regulation depend on the organisational structure of banks’ foreign affiliates. On a tight leash: does bank organisational structure matter for macroprudential spillovers? Piotr Danisewicz, Dennis Reinhardt and Rhiannon Sowerbutts.
Do multinational banks’ branches reduce their lending in foreign markets more than subsidiaries in response to changes in the regulatory environment in their domestic markets? And if so, how strong is this effect and how long does it last?
Studies show that multinational banks transmit negative shocks to their parent banks’ balance sheets – including changes in regulation – across national borders. In this paper we examine if the magnitude of the spillover effects depends on the organisation structure of banks’ foreign affiliates. We exploit cross-country cross-time variation in the implementation of macroprudential regulation to test if lending in the UK of foreign banks’ branches and subsidiaries respond differently to a tightening of capital requirements, lending standards or reserve requirements in foreign banks’ home countries.
Focusing on differences in lending responses of branches and subsidiaries which belong to the banking group allows us to control for all factors which might affect parent banks’ decisions regarding their foreign affiliates’ lending. Our results show that whether foreign branches or subsidiaries react differently to changes in regulation in their home countries depends on the type of regulation and the type of lending.
Multinational banks’ branches respond to tighter capital requirements in their home countries by contracting their lending more than subsidiaries. On average, branch interbank lending growth in the UK grows by 6.3 percentage point slower relative to subsidiaries following a tightening of capital requirements in the bank’s home country. This is in line with our hypothesis which predicts that branch lending will be affected due to higher degree of control which parent banks have over its foreign branches. But this heterogeneity in response to capital requirements is only observed in case of lending to other banks. We find that the response of lending to non-bank borrowers to a tightening in capital requirements does not depend on the organisational forms of foreign banks’ UK affiliates. Turning to the impact of a tightening in lending standards or reserve requirements, we find that there are no differential effects on interbank and non-bank lending.
Additional analysis suggests that the stronger contraction in the provision of interbank loans exhibited by branches is only contemporaneous – ie the differential effect fades out after one quarter. Our research provides some evidence that a branch structure is more likely than a subsidiary structure to transmit a tightening in capital requirements affecting the parent institution in the home country. However, the effects we find are short-lived which means that the potential negative effects associated with a higher number of foreign branches we find in this study may not necessarily outweigh any benefits.
