Introduction Literature Data Method Results Extensionsandrobustness Regulatory Arbitrage in Action: Evidence from Banking Flows and Macroprudential Policy DennisReinhardtandRhiannonSowerbutts BankofEngland April2016 FirstannualECBmacroprudentialpolicyandresearchconference Theviewsexpressedarethoseoftheauthors,andnotnecessarily thoseoftheBankofEngland. ReinhardtandSowerbutts RegulatoryArbitrageinAction:EvidencefromBankingFlows April2016 1/35 Introduction Literature Data Method Results Extensionsandrobustness Macroprudentialpolicies Sincetheglobalfinancialcrisistherehasbeenincreased attentionpaidto‘macroprudentialpolices’ Anumberofpolicieshavebecomewidelyused-suchas increasedcapitalrequirementsorloan-to-valuelimitsonhousing Butthesepoliciesmaybesubjectto‘leakage’asagentstryto avoidthem Mostofthefocushasbeenon‘shadow’banksbutalternative sourceisborrowingfromcountrieswithlessstringentregimes ReinhardtandSowerbutts RegulatoryArbitrageinAction:EvidencefromBankingFlows April2016 2/35 Introduction Literature Data Method Results Extensionsandrobustness Capitalregulationdoesnotapplyevenly ReinhardtandSowerbutts RegulatoryArbitrageinAction:EvidencefromBankingFlows April2016 3/35 Figure: Theapplicationofcapitalregulation Introduction Literature Data Method Results Extensionsandrobustness Butlendingstandardsgenerallyapplytoallproductssoldinacounty ReinhardtandSowerbutts RegulatoryArbitrageinAction:EvidencefromBankingFlows April2016 4/35 Figure: Theapplicationofproductregulation Introduction Literature Data Method Results Extensionsandrobustness Theresearchquestion Howdoestheborrowingofdomesticnon-banksfromforeign bankschangesfollowingdomesticmacropruactions? Ifsodoesitchangeforsomeinstrumentsmorethanothers? Andforbothtighteningandlooseningactions? Whatcanweuncoveraboutthecauseofthechange? ReinhardtandSowerbutts RegulatoryArbitrageinAction:EvidencefromBankingFlows April2016 5/35 Introduction Literature Data Method Results Extensionsandrobustness Theresearchquestion Howdoestheborrowingofdomesticnon-banksfromforeign bankschangesfollowingdomesticmacropruactions? Ifsodoesitchangeforsomeinstrumentsmorethanothers? Andforbothtighteningandlooseningactions? Whatcanweuncoveraboutthecauseofthechange? ReinhardtandSowerbutts RegulatoryArbitrageinAction:EvidencefromBankingFlows April2016 5/35 Introduction Literature Data Method Results Extensionsandrobustness Theresearchquestion Howdoestheborrowingofdomesticnon-banksfromforeign bankschangesfollowingdomesticmacropruactions? Ifsodoesitchangeforsomeinstrumentsmorethanothers? Andforbothtighteningandlooseningactions? Whatcanweuncoveraboutthecauseofthechange? ReinhardtandSowerbutts RegulatoryArbitrageinAction:EvidencefromBankingFlows April2016 5/35 Introduction Literature Data Method Results Extensionsandrobustness Theresearchquestion Howdoestheborrowingofdomesticnon-banksfromforeign bankschangesfollowingdomesticmacropruactions? Ifsodoesitchangeforsomeinstrumentsmorethanothers? Andforbothtighteningandlooseningactions? Whatcanweuncoveraboutthecauseofthechange? ReinhardtandSowerbutts RegulatoryArbitrageinAction:EvidencefromBankingFlows April2016 5/35 Introduction Literature Data Method Results Extensionsandrobustness PolicyRelevance Mattersforthedesignofinstruments: Instrumentchoice Instrumentstrength Reciprocation(togetridofthisunevenapplicationofregulation) Butalsoforunderstandinghowbanksreacttoothercountries’ macroprudentialmeasures: Bankexposures Reciprocation Riskanalysis ReinhardtandSowerbutts RegulatoryArbitrageinAction:EvidencefromBankingFlows April2016 6/35 Introduction Literature Data Method Results Extensionsandrobustness PolicyRelevance Mattersforthedesignofinstruments: Instrumentchoice Instrumentstrength Reciprocation(togetridofthisunevenapplicationofregulation) Butalsoforunderstandinghowbanksreacttoothercountries’ macroprudentialmeasures: Bankexposures Reciprocation Riskanalysis ReinhardtandSowerbutts RegulatoryArbitrageinAction:EvidencefromBankingFlows April2016 6/35