Cross-border banking, spillovers, and international macroprudential policy coordination

This chapter discusses the scope for international macroprudential policy coordination in a world where cross-border banking accounts for a large component of capital flows between countries. It begins with an analytical and empirical review of the channels through which global banks may amplify the cross-border effects of financial shocks, and how their lending decisions, in response to changes in national regulatory policies, may themselves be a source of financial spillovers. It then evaluates the potential gains associated with countercyclical macroprudential coordination, dwelling on both theoretical contributions and quantitative studies based on multi-country models. The scope for coordination between major advanced economies and a group identified as systemically important middle-income countries, in the context of Basel III’s principle of reciprocity, is also examined. The chapter concludes with a discussion of practical ways to promote international macroprudential coordination, including through a greater role of multilateral financial institutions.