Rhiannon Sowerbutts

Regulatory Arbitrage in Action: Evidence from Banking Flows and Macroprudential Policy

We use a new database on macroprudential policy actions to examine whether macroprudential regulations affect international banking flows. We find evidence that borrowing by the domestic non-bank sector from foreign banks increases after home authorities take a macroprudential capital action. We find no increase in borrowing from foreign banks after an action which tightens lending standards (such as limits on loan-to-value ratios for house purchase). Evidence on reserve requirements is mixed. Differences in the application of regulation for lending standards and capital regulation for international banks mean that while there is a level playing field for lending standards regulation, this does not always apply for capital regulation, giving foreign branches regulated by their home authorities a competitive advantage. Our results are, at first sight, different from the literature on regulatory arbitrage: we find that foreign banks expand their lending into host countries where regulation is tightened. But this does not occur when regulations apply also to them. The results have implications for macroprudential instrument choice and calibration, and for reciprocating regulation internationally.

Let’s talk about the weather: the impact of climate change on central banks

This paper examines the channels via which climate change and policies to mitigate it could affect a central bank’s ability to meet its monetary and financial stability objectives. We argue that two types of risks are particularly relevant for central banks. First, a weather-related natural disaster could trigger financial and macroeconomic instability if it severely damages the balance sheets of households, corporates, banks, and insurers (physical risks). Second, a sudden, unexpected tightening of carbon emission policies could lead to a disorderly re-pricing of carbon-intensive assets and a negative supply shock (transition risks). Climate-related disclosure could facilitate an orderly transition to a low-carbon economy if it helps a wide range of investors better assess their financial risk exposures.

On a tight leash: Does bank organizational structure matter for macroprudential spillovers?

This paper examines whether the effects of changes in the intensity of macroprudential regulation vary with the organisational structure of banks. Our analysis compares the response of foreign banks’ branches vs. subsidiaries to changes in the regulation in the home country of the parent bank. Focusing on branches and subsidiaries of the same banking group allows us controlling for all the factors affecting parent bank decisions regarding its foreign affiliates lending provision. We document that following capital regulation tightening branches of multinational institutions reduce interbank lending in the UK by 6% more relative to subsidiaries of to the same banking group. However, we find no differences in lending provided to the UK’s private sector. We also find no heterogeneity in the effect of reserve requirements and lending standards.

The International Transmission of Monetary Policy Through Financial Centres: Evidence from the United Kingdom and Hong Kong

This paper explores the cross-border transmission of monetary policy by comparing and contrasting the results for two major international financial centres: Hong Kong and the United Kingdom. We examine the effect of monetary policy in the US, euro area and Japan, on UK and Hong Kong-resident banks’ domestic lending behaviour, using individual bank-level data. Focusing on financial interconnections and other balance sheet characteristics as a transmission mechanism, we find that both of these factors play an important role in the transmission of foreign monetary policy. We are able to establish evidence for both a bank funding and bank portfolio channel of monetary policy, for both Hong Kong and the United Kingdom. There are important differences between the two countries; in particular, the currency denomination of lending appears to play a major role only in the United Kingdom, which probably reflects Hong Kong’s linked exchange rate system by which the HK dollar is pegged with the US dollar. These results contrast to the largely inconclusive results from previous studies, whose aggregate nature may have masked offsetting individual bank effects.

Bank capital and risk-taking: evidence from misconduct provisions

Over the last decade, banks around the world have been confronted with substantial misconduct costs. We employ provisions for misconduct costs as an instrumental variable to identify the causal effect of a bank capital shock on risk-taking. Using new hand-collected data, we show that misconduct provisions have adversely affected bank capital across U.K. banks. Our instrumental variable approach additionally exploits an important difference in timing between current risk-taking and the past misconduct that current misconduct provisions refer to. Our main finding is that a negative bank capital shock causes an increase in risk-taking in the U.K. mortgage market.

Cross-Border Regulatory Spillovers: How Much? How Important? What Sectors? Lessons from the United Kingdom

This paper forms the United Kingdom’s contribution to the International Banking Research Network’s project examining the cross-border spillovers of prudential policy actions, where each participant in the network uses proprietary bank-level data available to central banks. We examine whether UK-owned banks’ domestic lending is affected by prudential actions in other countries where they have exposures. We also examine the impact of a change in prudential policy in a foreign-owned UK-resident bank’s home jurisdiction on its lending to the United Kingdom. Our results suggest that prudential actions taken abroad do not have significant spillover effects on bank lending in the UK economy as a whole. But there are more granular effects: for instance, when a foreign authority tightens loan-to-value standards, UK affiliates of banks owned from that country expand their lending to UK households and corporates.

Market Discipline, Public Disclosure and Financial Stability

Inadequate disclosure by commercial banks has been cited as a contributing factor to the financial crisis. Banks did not report enough information about the assets they were holding or the risks that they were exposed to, and inadequate disclosure meant that investors were less able to judge risks to a bank’s solvency than bank insiders, such as managers. Investors did not demand sufficient disclosure prior to the crisis. Possible reasons for this include risk illusion, or expectations that governments would be willing and able to bail out failing banks.