Effectiveness Of Macroprudential Policies Research Articles

Effectiveness of Macroprudential Policies on Credit Surge and Stop Episodes

Effectiveness of Macroprudential Policies on Credit Surge and Stop Episodes

Effectiveness and conduct of macroprudential policy in Indonesia in 2003–2020: Evidence from the structural VAR models

The paper examines the effectiveness of macroprudential policy in Indonesia and policy reactions to economic developments. Using the structural vector autoregression and data on the regulatory LTV ratio, we investigate the policy effectiveness in controlling credit growth and real property prices along with the effects on economic activity. We find that the LTV-based policy in Indonesia is effective in taming credit growth in the medium run. It, however, is not the case with real property prices whose response to policy changes is counterintuitive and resembles the price puzzle found in the studies on monetary policy. Moreover, our results lend moderate support to the effect of LTV policy on economic activity, especially in the non-COVID-19 sample. We also show that the LTV policy in Indonesia is conducted in an active and circumspective way. In a series of robustness checks, we demonstrate that the results hold when the ordering of variables is changed, alternative proxies for macroprudential policy, output gap, and financial conditions are employed, or the sample is limited to the non-COVID-19 period.

Assessing the Effects of Macroprudential Policy on the Indian Macroeconomy

ABSTRACT This study examines the impact of macroprudential policy (MaPP) on macroeconomic conditions. Using data from 2004–2005 to 2019–2020, this study finds that increased use of MaPP is associated with higher consumption and economic growth. However, this study does not find a significant effect on inflation. From a threshold perspective, the study reveals that MaPP has a positive impact on consumption and economic growth up to a threshold level of 34.00; however, above this level, MaPP has a negative impact on both variables. Similarly, MaPP has a positive impact on inflation rates below the threshold level but has a negative impact above it. From a tail risk perspective, MaPP has a positive impact on the bottom quantile of economic growth.

Procyclicality of the Financial Systems in Emerging Economies

This research aimed at examining the procyclicality of financial systems in emerging economies, with a particular focus on the role of loan loss provisions. In total, 318 articles were initially retrieved, which after applying the inclusion and exclusion criteria, led to final selection of 15 relevant and latest articles. From the literature reviews, it was found that financial systems in emerging economies exhibit procyclicality behaviour, corresponding to economic cycles. Loan loss provisions, as a key component of bank financial statements, play a significant role in the procyclicality of lending activity. Studies from various countries, including African economies, Jordan, South Africa, Kenya, and the Gulf Cooperation Council (GCC) countries, reveal both pro- and counter-cyclical patterns of loan loss provisions. The degree of procyclicality is influenced by factors such as bank capitalization, bank size, competition, business cycles, macroprudential policies, and the regulatory and supervisory framework. Notably, the findings suggest that policy makers and banking authorities need to address the procyclicality of loan loss provisions and implement effective macroprudential policies to mitigate the impact of economic cycles on lending activities. The study recommends that financial institutions should develop robust risk management practices to better manage economic fluctuations and reduce the impact of procyclicality.

Analysis of the Effectiveness of Banking Credit Risk Control with Macroprudential Policy in Indonesia

High credit risk will affect the health of the bank which will be a factor causing systemic risk. This research aims to analyze the effectiveness of macroprudential policy in controlling banking credit risk in Indonesia. This research uses Non-Performing Loans (NPL) as an indicator of credit risk. Meanwhile, as indicators of macroprudential policy, policy instruments such as LTV (Loan to Value), RIM (Macroprudential Intermediation Ratio), DTI (Debt to Income), and COC (Ceilings on Credit). The analytical method used in this research is panel data regression analysis with a fixed effect model (FEM). The research results show that simultaneously each macroprudential policy instrument, be it RIM, DTI, and COC, influences banking credit risk in Indonesia, and easing policy on LTV is unable to reduce NPLs.

Macro-Prudential Policy and Bank Systemic Risk: Cross-Country Evidence Based on Emerging and Advanced Economies

ABSTRACT This study examines the effects of macro-prudential policy on bank systemic risk by using a cross-country panel data of 65 economies. We find that: (1) macro-prudential policy mitigates bank systemic risk by decreasing the individual risk of banks and systemic linkage between banks; (2) the effect is stronger for banks with larger sizes, wider geographical regions of operation, and more diversified business services; (3) the effect is stronger in countries with less-developed or less-open financial systems, more concentrated banking industries, and emerging economies; (4) the policy-risk relationship is stronger when credit is more crunched, monetary policy is looser, a financial crisis occurs, or after the subprime crisis.

Macroprudential Policy, Mortgage Cycles, and Distributional Effects: Evidence from the United Kingdom

Abstract We analyze the distributional effects of macroprudential policy on mortgage cycles by exploiting the U.K. mortgage register and a 2014 15% limit imposed on lenders’ high loan-to-income (LTI) mortgages. Constrained lenders issue fewer and more expensive high-LTI mortgages, with stronger effects on low-income borrowers. Unconstrained lenders strongly substitute high-LTI loans in local areas with higher constrained lender presence, but not high-LTI loans to low-income borrowers—consistent with adverse selection problems—implying lower overall credit to low-income borrowers. Consistently, policy-affected areas experience lower house price growth postregulation and, following the Brexit referendum (negative aggregate shock), better house price growth and lower mortgage defaults for low-income borrowers.

The contribution of macroprudential policies to banks' resilience: Lessons from the systemic crises and the COVID‐19 pandemic shock

AbstractThis study examines the effectiveness of macroprudential policies in reducing the banks' risk during the COVID‐19 pandemic and compares these results with the systemic banking crises years. Based on a sample of 624 banks across 40 countries during the period 2006–2020, we find that loosening capital‐aimed macroprudential policies effectively reduced banks' risk during the COVID‐19 pandemic, while this behavior led to increased risk during the systemic crises years. In contrast, tightening the remaining macroprudential policies during the systemic crises years and during the pandemic proved effective in reducing banks' risk. Furthermore, we show that the magnitude of the impact of macroprudential policies was stronger during the systemic crisis than that during the pandemic. Finally, we show that the results are driven by the capital requirement prudential policy, both during the systemic crisis and the COVID‐19 pandemic, although the conservation buffer and the leverage limit also contributes to the ineffectiveness of these policies during the COVID‐19 pandemic. The banks' leverage and loan growth also play an enhancing role of the effects of the macroprudential policies.

Macroprudential policy leakage: Evidence from shadow banking activities of Chinese enterprises

AbstractUsing entrusted loan data of Chinese listed enterprises, we study whether the implementation of macroprudential policy leads to enterprise policy arbitrage. Our findings reveal that tightening macroprudential policies significantly contribute to the promotion of shadow banking activities among Chinese enterprises, confirming the existence of policy leakage. When the overall credit is tight, non‐affiliated loans and loans to privately‐owned enterprises increase significantly. Tightening policies also have a more substantial effect on the borrowing cost of non‐affiliated and privately‐owned enterprise borrowers. To enhance the effectiveness of macroprudential policy, our results suggest the necessity of providing appropriate credit supports for small and medium enterprises.

Are there financial stability gains from international macroprudential policy coordination?

AbstractWe construct a core‐periphery theoretical model based on the cross‐border spillover effects of macroprudential policies, to calculate the financial stability gains from macroprudential policy coordination between the two countries. Numerical simulation results show that the gains from coordination between the core and the periphery are zero when facing reverse monetary policy shocks, when macroprudential policy coordination is not needed; however, in the case of high simultaneous loosening (tightening) of monetary policies in both countries, the macroprudential policy coordination mechanism can reduce the negative externalities of cross‐border financial spillovers and increase the total gains from financial stability; the total gains from macroprudential policy coordination increase as the peripheral macroprudential policy operating space decreases, the degree of cross‐border financial spillovers increases, and the degree of cross‐border spillovers from core monetary policy increases. Therefore, the international coordination of macroprudential policies has certain possibilities and necessities.

Does macroprudential policy affect wealth inequality? Evidence from synthetic controls

This paper examines the effects of macroprudential policy (MaPP) on wealth inequality using a large dataset of 171 countries. I find that, after the adoption of MaPP, wealth concentration in the treated countries increases by 3.4 percentage points in a decade. This finding is explained by a rise in the wealth share of the top 1% combined with a sharp decline in the wealth share of the bottom 50%. These effects are stronger for prudential rules based on income, particularly in advanced economies.

Macro-prudential policy, its alignment with monetary policy and house price growth: A cross-country study

We study how the alignment or mis-alignment between macro-prudential policy and monetary policy influences the effect of macro-prudential policy on mitigating booms in housing markets. The results based on a panel dataset consisting of 41 countries over the period of 2000–2014 show that when the two policy tools change in the same direction (loosening or tightening), the effect of macro-prudential policy on house price growth strengthens. When they change in the opposite directions (one loosening and the other tightening), the effect of macro-prudential policy weakens. Our findings also point out the heterogeneous nature of the impact showing that these effects occur mainly in emerging economies and are particularly strong for policy tools that are designed specifically for housing market. Our findings contribute to the understanding of how coordination of macro-prudential and monetary policies helps to combat house price growth and carry important policy implications.

Anticipating the Unforeseen and Expecting the Unexpected: Effectiveness of Macro-Prudential Policies in Curbing the Impact of Stranded Assets in the Banking Sector

Banks are exposed to climate risks through stranded assets. This risk can be substantial in the banking sector, as it can spawn systemic risk. After the Great Recession, macro-prudential instruments effectively addressed systemic risk. However, climatic risks raise the research question of how feasible it is to address them by adopting macro-prudential instruments. The researchers, therefore, investigate how banks can respond to the risk posed by stranded assets through the framework of using macro-prudential instruments. A semi-systematic review of the related literature is carried out based on the researchers’ aim to evaluate theory evidence in the effectiveness of macro-prudential instruments in addressing climate-related risks. The adaptability of macro-prudential instruments to address climatic risks and, by implication, systemic risk is demonstrated in the findings. The researchers develop a framework constituting climate transparency disclosures, climate capital requirement ratio, climate capital conservation, carbon countercyclical buffer and macro-prudential climate stress tests to mitigate the effects of climate risks in banking.

Effects of LTV announcements in EU economies

Earlier empirical studies on the effects of macroprudential policies focus on implementation dates and, in most cases, ignore potential anticipation effects. In this paper, we collect monthly data on announcements of loan-to-value (LTV) ratio restrictions covering 18 EU economies during the period 2000–2019. We show that announcements of LTV tightening policies can have a sizeable negative impact on household credit, house prices, and household durable goods consumption. We find that the estimated contractionary effects on household credit are driven by announcements with delayed implementation, whereas the effects on house prices are driven by announcements with quick implementation. We also show that the above contractionary effects are stronger following announcements of binding actions and actions without speed limits, suggesting that the design of macroprudential policies matters for their effectiveness.

Effectiveness of Macroprudential Policy: Problems of Measurement and Evaluation

The macroprudential policy of central banks plays a key role in ensuring financial stability not only at the level of individual states but also on the scale of the entire global economy. In this regard, adequate measurement of its effectiveness is an urgent task for national and supranational financial regulatory authorities. The present study is focused on solving this problem. The purpose of the study is to develop indicators and criteria for a comprehensive assessment of the effectiveness of countries’ macroprudential policies, allowing for a cross-country analysis of this effectiveness and identifying the best global practices in macroprudential regulation. The study is based on the consolidation of the market and institutional approaches to measuring financial stability, as well as on the use of normative methods and methods of comparative economic analysis. As a result of the study, new indicators for diagnosing the effectiveness of macroprudential policy have been developed. Criteria are proposed to determine the international positions of countries in terms of the level of general, market, and institutional effectiveness of the macroprudential policy. Testing of the developed indicators and criteria was carried out for 180 countries for the period 1998–2019. The developed indicators and criteria for the effectiveness of macroprudential policy differ from the existing ones in a comprehensive manner, since they take into account the stability of financial markets and financial systems at the same time. They are also more representative as they include a wider range of parameters taken into account in financial stability calculations.

Differential Effects of Macroprudential Policy

Differential Effects of Macroprudential Policy

Heterogeneous effects of macroprudential policies on firm leverage and value

We empirically investigate the effect of financial institution-targeted macroprudential policies on firms using a comprehensive macroprudential policy dataset and corporate panel data across 35 countries. We find that tightening of macroprudential measures persistently curbs the leverage of firms, while loosening is related to the increase in leverage. We also find that this effect on leverage is heterogeneous across firms, as net macroprudential policy actions reduce the procyclicality of leverage more significantly for small firms and firms with high leverage. Also, we estimate the effect of macroprudential policies on firm value to evaluate potential policy trade-offs as the policies restrict the firms' access to credit during economic booms while protecting them from future financial crises. The effect of macroprudential policies on firm value is generally positive despite the policies' restrictive nature. Further, the effect on firm value is heterogeneous depending on firm characteristics: the positive effect becomes stronger as firms are less leveraged, but this positive effect is weaker for firms that grow faster, suggesting potential costs of macroprudential policies for these firms.

The distributive effects of macroprudential policy: evidence from the South African credit market

The distributive effects of macroprudential policy: evidence from the South African credit market

The Effect of Macroprudential Policy on Credit Growth and Financing of MSMEs in Indonesia

The global crisis in 2008 had weakened the Financial System Stability (FFS) of almost every country. This financial crisis proved that the country had not been really responsive to global change so the financial system risk management done by the central bank was not able to stabilize the crisis. The formulation of macroprudential policies aims to mitigate the bank behavior in distributing credits and financing to the MSMEs which are pro-cyclical. Macroprudential policy instruments used in this study are Loan to Value (LTV)/ Financing to Value (FTV) and Minimum Statutory Reserves based on Loan to Deposit Ratio (LDR)/ Financing to Deposit Ratio (FDR). In addition, there are also macroeconomic variables and bank liquidity variables. The purpose of this study is to see how the influence of macroprudential policies on credit growth and MSME financing distributed by banks. The research method used is the Vector Error Correction Model (VECM) analysis using time series data from January 2010 to July 2020. The results show that macroprudential policies have not been able to suppress financing and in general the macroeconomic variables and bank liquidity also have an influence on credit and financing.

Stability of financial development: Problems of measurement, assessment and regulation.

Adequate measurement, assessment, and regulation of financial development stability are key components, the formation of effective macroprudential policies, and the coordination of these policies among countries. However, an analysis materials on the subject shows that work in this area is fragmented,. In this regard, the purpose of this study is to develop a methodology for diagnosing and regulating the stability of financial development based on a systematic approach. The study used systematic, comparative, and GEO analysis, econometric methods. As a result, new indicators have been developed to diagnose the financial development of countries. The authors also propose criteria, which could be used to signal the need for countercyclical regulation tools. The novelty of the study lies in a systematic approach to the diagnosis and regulation of the stability of financial development. The systemic nature of the study is ensured by the application of the statistical framework of the System of National Accounts. Testing of the developed indicators and criteria was carried out in relation to the OECD+ (Organisation for Economic Co-operation and Development) countries for the period 2007-2020. As a result of the testing, a rating of countries was built according to the level of stability of financial development. This rating highlighted leading countries as well as countries generating systemic risks. The study also assessed the legal grounds behind the introduction of a countercyclical markup by a number of countries. The new diagnostic and regulatory system has a number of advantage-it is highly representative and objective by nature, and has a wide range of applications. The use of this system will improve the complexity and quality of diagnosing and regulating the stability of financial development at the national and global levels, as well as increase the effectiveness of public decision-making.