Spillovers of prudential policy across borders: evidence for Portugal

When a (macro-)prudential authority implements tools available within its toolkit, its primary concern is with the domestic financial stability, independently of the domestic or foreign origin of the risks. However, an important aspect that is often neglected is that these decisions may have (positive or negative) cross-border spillovers. In this article we summarize the results for Portugal of a joint international research project involving central banks worldwide, to study cross-border effects of bank regulation using bank-level data. We confirm that credit developments in Portugal are affected by foreign bank regulation. This effect depends on the type of regulation and on the channel of transmission. We also show that the cross-border effects of capital requirements work differently through branches and subsidiaries of foreign banks operating in Portugal.