March 2017 issue contents
International Banking and Cross-Border Effects of Regulation: Lessons from Canada

by H. Evren Damara and Adi Mordelb


We study how changes in prudential requirements affect cross-border lending of Canadian banks by utilizing an index that aggregates adjustments in key regulatory instruments across jurisdictions. We show that when a destination country tightens local prudential measures, Canadian banks increase the growth rate of lending to that jurisdiction, and the effect is particularly significant when capital requirements are tightened and weaker if banks lend mainly via affiliates. Our evidence also suggests that Canadian banks adjust foreign lending in response to domestic regulatory changes. The results confirm the presence of heterogeneous spillover effects of foreign prudential requirements.

JEL Codes: F34, G01, G21.

Full article (PDF, 30 pages, 471 kb)

a Hobart and William Smith Colleges 
b Bank of Canada