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How CCyBs travel - Internal capital markets & domestic borrowing
- In this paper, we study how foreign countercyclical capital buffer (CCyB) increases affect multinational corporations (MNCs) and show that tighter regulation abroad can shift credit risk across borders rather than reduce it. The key mechanism is the internal capital market of multinational firms. We exploit a clean empirical setting by looking at MNCs with German parents and foreign subsidiaries. Germany did not activate a CCyB between 2013 and 2019, while many countries hosting German subsidiaries did.
- When a subsidiary‘s host country raises its CCyB by one percentage point, German bank lending to that subsidiary falls by roughly 10 percent. Subsidiaries replace lost bank credit by borrowing more from their parent companies. This internal substitution is effectively complete. Total liabilities, leverage, and probabilities of default of affected subsidiaries remain unchanged. Parents with subsidiaries affected by foreign CCyB increases borrow more externally in Germany. Parents‘ probability of default increases by around 25 percent relative to the average parent probability of default.
- CCyBs reduce bank lending where they are applied, but multinational internal capital markets of firms neutralize these effects at the subsidiary level and reallocate leverage and risk across borders. This underscores the limits of purely national macroprudential tools in integrated economies and points to the importance of international coordination when assessing the effectiveness and side effects of financial regulation.
- When a subsidiary‘s host country raises its CCyB by one percentage point, German bank lending to that subsidiary falls by roughly 10 percent. Subsidiaries replace lost bank credit by borrowing more from their parent companies. This internal substitution is effectively complete. Total liabilities, leverage, and probabilities of default of affected subsidiaries remain unchanged. Parents with subsidiaries affected by foreign CCyB increases borrow more externally in Germany. Parents‘ probability of default increases by around 25 percent relative to the average parent probability of default.
- CCyBs reduce bank lending where they are applied, but multinational internal capital markets of firms neutralize these effects at the subsidiary level and reallocate leverage and risk across borders. This underscores the limits of purely national macroprudential tools in integrated economies and points to the importance of international coordination when assessing the effectiveness and side effects of financial regulation.
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