Prudential Literature Review

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In this section, it will be presented literature review to present what was already researched in according to the thesis topic. Three-part included 1. Prudential policies – studies which examine effectivity of Micro and Macroprudential policies and related spillovers 2. Capital flows – examining possible reasons for cross-border capital flows. 3. The prudential policy effects on cross-border capital flows – examining studies which trying to see the effect of prudential policy on dependent variable cross-border capital flows. 2.1 Policy instruments “Macroprudential instruments are typically introduced with the objective of reducing systemic risk, either over time or across institutions and markets. Countries use a variety of tools, including…show more content…
This spillover sometimes negative and sometimes positive depending on bank activity type. The additional key finding was the balance sheet condition and bank’s business model is a predictor of the intensity of policy related spillover. Bengui & Bianchi (2014) analyse and create an optimal model of capital flow management for the case where we accept capital controls leaking and presence of “shadow economy”, assuming that leakages occur limited regulation enforcement. Was found that when tightening regulation applied, regulated agents, behaving less risky. When unregulated agents feel safer in stabilized and regulated environment and respond by taking more risk. The main outcome of this paper is that stabilization benefits of capital flow managing Macroprudential policy present and larger that optimal looses from the leakages. 2.3 Macroprudential policies and capital…show more content…
Researchers found that domestic capital requirements tightening leads to increase of lending by foreign banks to domestic non-banking financial institutions. Lending standards policy do not increase foreign borrowing because this tool applies to all lending products both domestic and foreign. Also found that after tightening macroprudential policy application bank expands lend as long as this regulation not affecting it. Research suggests that these types of externalities will disappear at the moment reciprocity networks will be founded and policy application will be coordinated between the

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