International Banking and Cross-Border Effects of Regulation: Lessons from Chile

In this paper we apply the inward transmission approach described in Buch and Goldberg (2017) to a selected group of internationally active banks in Chile for the 2002: Q2-2013: Q4 sample period. We find that the spillover effects generated by changes in the prudential policy abroad have a positive but relatively weak impact on domestic lending. When comparing the two inward approaches suggested by Buch and Goldberg (2017), the spillovers transmitted through the exposure-weighted prudential policy are stronger and economically more significant than those through the foreign subsidiary relationship. This result is robust to different specifications, and might suggest that foreign subsidiaries in Chile behave just like domestic banks, as they have to comply with the local regulation in the same way as local banks. Above all, capital requirements appear to be the most significant prudential policy affecting domestic lending.