The Board of Governors of the Federal Reserve System published an International Finance Discussion Paper reviewing the cross-border effects of international banking regulation. The paper attempted to answer the following questions: First, do changes in foreign prudential instruments affect lending growth in the United States? Second, do U.S. global banks adjust their foreign operations when foreign prudential instruments change? Third, do U.S. regulatory changes spill over into foreign countries via U.S. global banks?
The paper concluded that:
- Lending growth in the United States "rises with tighter foreign capital requirements, limits on loan-to-value ratios and local currency reserve requirements enacted in foreign economies";
- The largest U.S. global banks, those that are deemed systemic and thus have been required to finance a larger proportion of their balance sheets with capital, appear to cut credit abroad relatively more than the smaller banks in response to tighter capital requirements in the United States; and
- Although the intent of those capital requirements was not to reduce the supply of credit, the short-term effect points to lower foreign claims growth as a result of the stricter requirements. In contrast, "the use of prudential instruments by foreign authorities does not have a significant impact on the activities of U.S. banks in those foreign countries."
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