Effectiveness Of Macroprudential Policies Research Articles

The Effects of Macroprudential Policies on the Performance of Conventional Banks in Indonesia

Abstract A resilient banking system in Indonesia is essential to withstand economic fluctuations that have significantly impacted Indonesia, especially during financial crises. To address these challenges, effective macroprudential policies are required to support the development of a high-performance banking sector. This research examines the impact of macroprudential policies on the performance of conventional banks in Indonesia. The research uses time-series data from 2014 to 2023 obtained from the Indonesian Financial Services Authority (OJK) and the Central Bank of Indonesia (BI). The data is analysed using the Vector Autoregression (VAR) method. The variables estimated include macroprudential policy instruments, including the Macroprudential Intermediation Ratio, Countercyclical Capital Buffer, Loan-to-Value ratio, Minimum Statutory Reserves, and Return on Assets. The results of the study found that most macroprudential measures do not have a substantial impact on the performance of conventional banks in Indonesia. Only Minimum Statutory Reserves significantly affect Return on Assets. Additionally, most variables do not exhibit reciprocal relationships. However, some variables display unidirectional effects. Specifically, the Countercyclical Capital Buffer has a significant causal impact on Return on Assets, while Minimum Statutory Reserves also play a notable role in affecting Return on Assets. Moreover, there is a causal relationship between the Macroprudential Intermediation Ratio and Minimum Statutory Reserves, as well as between the Countercyclical Capital Buffer and Minimum Statutory Reserves. The results of this study can contribute to policies in helping regulators formulate strategies to deal with future economic crises by ensuring that existing policies can maintain financial stability.

The effects of macroprudential policies on house prices: Evidence from non-ordinary house purchasing policy using China real transaction data

This paper contributes to the international policy debate on the effect of macroprudential policy on housing prices. Our identification relies on the fact that ordinary housing and non-ordinary housing in Beijing face different loan-to-value (LTV) restrictions and transaction tax rates. This paper uses regression discontinuity (RD) design to test whether the differentiated regulation of ordinary housing and non-ordinary housing caused a discontinuous change in housing prices with house-level transaction data. We find that housing prices have a significant discontinuous decline at the cutoff point caused by macroprudential policy, which we take 140 m2 s since it is the identification standard of non-ordinary housing. Further, we carry out RD-DID analysis to investigate the influence of loan-to-value (LTV) restrictions on housing prices. We find that around 2 % decline in house prices is caused by credit policy.

Shadow banking, macroprudential regulation and redistributional effects*

ABSTRACT This paper studies the implications of increasing the size of the shadow banking sector for economic activity, financial stability, and welfare. I consider a DSGE model in which lending can come from two different sources; a formal bank or private lending. Banking regulation, in the form of capital requirements, only applies to the formal banking sector. Private lenders represent the shadow banking system. Results show that an increase in shadow banking leads to a higher amount of credit in the economy, which in turn implies higher consumption by borrowers. However, after a certain threshold, a large proportion of shadow banking is welfare decreasing. Moreover, the presence of an unregulated banking sector can lead to unintended effects of macroprudential policy. That is, stricter regulation in the traditional banking sector by the authorities may result in an increase in credit flows to those banks with lower regulatory levels, especially when this regulation comes from borrower-based instruments. Thus, macroprudential authorities should take into account these redistributional effects of shadow banking when considering their regulatory perimeter.

The Effect of Macroprudential Policy on Income Inequality

The Effect of Macroprudential Policy on Income Inequality

Effects of macroprudential policy: Evidence from over 6000 estimates

This paper builds a novel database on the effects of macroprudential policy drawing from 58 empirical studies, comprising over 6000 results on a wide range of instruments and outcome variables. It encompasses information on statistical significance, standardized magnitudes, and other characteristics of the estimates. Using meta-analysis techniques, the paper estimates average effects to find (i) statistically significant effects on credit, but with considerable heterogeneity across instruments; (ii) weaker and more imprecise effects on house prices; (iii) quantitatively stronger effects in emerging markets and among studies using micro-level data; and (iv) statistically significant evidence of leakages and spillovers. Other findings include relatively stronger impacts for tightening than loosening actions and negative effects on economic activity in the near term.

Exploring causal interactions between macroprudential policy and financial cycles in South Africa

This study investigated the causal interactions between macroprudential policy, measured by the Macroprudential Policy Index (MPI), and financial cycles represented by the Aggregate Financial Cycle (AFC) and the Credit and Asset Prices Financial Cycle (CAFC) in South Africa from 1970q1 to 2023q2. Additionally, the study explored the effects of macroprudential policy during different phases of financial cycles. Using the time-varying Granger-causality model, the study found that the MPI Granger-caused financial cycles during the 2003/07 credit boom in South Africa, while the AFC and CAFC Granger-caused macroprudential policy during the Covid-19-induced collapse of financial markets. The results suggest that macroprudential policy is employed more proactively during financial booms and more reactively during financial busts in South Africa. The Markov switching dynamic regression model used to assess the MPI's effects revealed that macroprudential policy's effectiveness is stronger during financial busts and weaker during financial booms in South Africa. This is because financial institutions in South Africa tend to resist stricter regulations during boom phases due to heightened optimism about future prospects. Conversely, they are more receptive to stimulatory interventions during bust phases. Based on these findings, it is recommended that the South African Reserve Bank and the Prudential Authority use macroprudential policy more assertively during financial booms to enhance its effectiveness. This could involve setting more stringent parameters upon activating macroprudential policy tools or complementing macroprudential policy with monetary policy during financial booms.

Does macroprudential policy have any side effects on the shadow economy?

Purpose This paper aims to examine the impacts of macroprudential policy on the shadow economy worldwide. Design/methodology/approach We compile a panel dataset covering 125 countries from 1990 to 2018. This paper mitigates potential endogeneity issues via two-stage least squares and the two-step generalized method of moments (GMM). Findings The robust results show that the overall tightening of macroprudential policies exerts an expansion impact on the shadow economy. Further examination of the 16 individual macroprudential policy instruments finds that loan restrictions, countercyclical buffers, surcharges for systemically important financial institutions and capital conservation buffers have positive and statistically significant effect on the shadow economy. This relationship is only present during tightening episodes of macroprudential policy as loosening episodes do not exhibit any significant impact. Finally, this paper documents the nonlinear effects of macroprudential policy. Practical implications The results suggest that the supervisory authorities may need to consider another parameter, which is the development of the shadow economy, when devising the optimal macroprudential policy responses. Originality/value To the best of the authors’ knowledge, this paper is likely the first to empirically document the impact of macroprudential policy on the shadow economy. It contributes to the growing literature on the potential side effects of macroprudential policy on the macro-economy.

Macroprudential policy effectiveness and interaction with monetary policy: Lessons from debt service-to-income cap implementation in Kazakhstan

We take advantage of the early adoption of the debt-service-to-income cap (DSTI) measure in Kazakhstan, as well as available granular information from the local credit registry to study the effects of macroprudential instruments on core financial stability parameters. Our results show that implementation of a DSTI cap of 50 % leads to around a 9 % decrease in 12 months in the amount of outstanding debt on average for the range of credits originated just around the introduction of the DSTI cap. We find that DSTI cap implementation decreased the probability of delinquency rates of loans by about 20 % in 12 months on average compared to credits granted before the realization of the DSTI cap. We provide evidence on the importance of loan size heterogeneity across time when estimating the impact of macro-prudential intervention, which is partly overlooked in the existing literature. Finally, our results suggest that macroprudential and monetary policy tools can be complementary depending on the specific business cycle developments.

Coordination of monetary and macroprudential policies, land finance behavior and risk prevention in the real estate market

ABSTRACT This paper measures the real estate market risk in China by embedding the relative volatility of stock returns in the real estate industry into the Marginal Expected Shortfall Model. Subsequently, we examine the effectiveness of the coordination of monetary and macroprudential policies in preventing real estate market risk based on panel data from cities. Additionally, we investigate the impact of local government’s land finance behavior on the effectiveness of the coordination of these two policies. The results show that the tightening monetary policy can strengthen the restraining effect of macroprudential policy on real estate market risk. From the perspective of risk prevention in the real estate market, whether it is a quantitative or price-based monetary policy tool, land finance behavior can weaken the regulatory effect of the coordination of monetary and macroprudential policies. Moreover, this weakening effect is more pronounced in the regions with high vertical fiscal imbalance and intense economic competition. One of the important policy implications is that regulatory authorities should strengthen the coordination among local fiscal behavior, monetary policy, and macroprudential policy. This will enhance the effectiveness of the coordination of monetary policy and macroprudential policy to prevent risks in the real estate market.

Влияние макропруденциальной политики на риски банковских холдинговых компаний США

В условиях усиления неопределенности на финансовых рынках накопление рисков в банковском секторе выдвигает на передний план острую необходимость введения макропруденциальной политики (МПП), в том числе в свете банкротства ряда ведущих американских банков. В работе анализируется влияние МПП на риски крупных банковских холдинговых компаний (БХК) США с совокупными активами более 100 млрд долл., которые относятся к категории системно значимых финансовых организаций. Применение двухшагового обобщенного метода моментов позволило оценить влияние мер МПП на динамический показатель риска ∆CoVaR (Conditional Value at Risk) для каждой БХК. На примере банковского сектора США результаты исследования подтверждают понижающее воздействие ужесточения МПП на риски БХК, что особенно выражено в случае роста требований к резервированию против возможных потерь по ссудам, ужесточения стандартов кредитования, требований к уровню левериджа и мер, нацеленных на системно значимые банки. По итогам моделирования мы пришли к выводу, что меры МПП гетерогенно влияют на различные типы БХК США, выделенные с помощью метода главных компонент, а также выявлено асимметричное воздействие ужесточающих и смягчающих мер МПП на риски БХК. Полученные выводы дают лучшее понимание инструментария МПП в США и могут иметь практическую значимость для дальнейшего совершенствования МПП в России. Amid increasing uncertainty in the global fi nancial markets, the accumulation of risks in the banking sector highlights the lack of alternatives to macroprudential policy (MPP), including bankruptcy of several leading U.S. banks. The paper investigates the impact of macroprudential policy on the risks of large U.S. bank holding companies with total consolidated assets exceeding $100 billion which are classifi ed as systemically important fi nancial institutions. We study the extent to which macroprudential policy may infl uence dynamic market- based ΔCoVaR (Conditional Value at Risk) risk measure of large U.S. banks supported by the two-step generalized method of moments. The results confi rm the downward impact of macroprudential tightening policy on risks, which is especially pronounced in the case of increased loan loss provision requirements, stricter lending standards, leverage requirements and measures targeting at systemically important banks. The research results show that macroprudential policy measures have a heterogeneous effect on different types of banks selected by the principal component analysis method. We also found the asymmetric impact of tightening and loosening macroprudential policy measures on risks for large U.S. banks. Our fi ndings provide a better understanding of the macroprudential policy toolkit in the United States and may have practical implications for banking sector regulators.

Macroprudential policies, capital controls, and income inequality

AbstractThis paper investigates the impact of macroprudential policies, capital controls, and their joint effect on income inequality. Using a panel dataset covering 60 countries from 2000 to 2019, we find that macroprudential policies and capital controls can mitigate income inequality, which are robust to various subsets of policy indexes. However, the effectiveness of macroprudential policies on income inequality depends on the tightness of capital controls. We verify that macroprudential policies affect income inequality through private sector leverage, and both capital controls and macroprudential policies have significant influences on gross capital flows and net capital flows to affect income inequality.

The Side Effects of Macroprudential Policies on Economic Performance in the Arab Region

Abstract Macroprudential policy mainly aims to enhance financial stability and reduce the possibility of costly financial crises. However, to achieve this, macroprudential policy decisions may have some unintended side effects on economic growth. The paper provides an empirical framework for investigating potential side effects of macroprudential policy tools in developing countries. The results show that macroprudential policy decisions may lead to a decline in economic growth in developing countries, but the depth and efficiency of the financial sector may interact with macroprudential policy decisions to support economic environment stability. In the Arab region, the results differ compared to other developing countries, as the macroprudential policy interventions have a positive impact on economic growth, especially for the macroprudential tools that aim to enhance the resilience of the banking sector, while there is no effect of the cyclical macroprudential tools on economic growth.

Do macroprudential policies reduce risk spillovers between energy markets?: Evidence from time-frequency domain and mixed-frequency methods

Preventing volatility spillovers between energy markets is essential for maintaining financial stability. Macroprudential policies play an invaluable tool in financial risk monitoring and help to reduce the incidence of systemic risk. However, the effectiveness of macroprudential policies on risk spreads in the energy system is still unclear. This article applies the TVP-VAR (time-varying parameter vector autoregression) spillover methods to capture the risk connectedness between energy markets in the time and frequency domains, and constructs an asymmetric GARCH-MIDAS-MPP model to investigate the influence of macroprudential policies on volatility overflows of the energy system. The results suggest that there are strong risk links between global energy markets and long-term risk resonances play a dominant role. Time-varying risk overflows occur throughout the energy sector, and market turbulence amplifies these risk communications. Whether on a time or frequency horizon, the oil market represents the largest emitter of fluctuation transmissions, while the fuel oil market stands out as the biggest recipient of risk diffusion. We do not observe that macroprudential policies can significantly reduce the average and long-run risk premiums of the energy system. Conversely, our results reveal that macroprudential policies intensify short- and medium-term risk spreads between global energy markets. This paper provides some insight into energy market risk contagion, which is conducive to the improvement of macroprudential policies for energy market risk management.

A DSGE Model with Government-owned Banks

Abstract How relevant are government-owned banks in the economy, especially during recessions? We study the role of government-owned banks in a dynamic stochastic general equilibrium (DSGE) model with heterogeneous financial intermediaries, heterogeneous households, and minimum capital requirement constraints. We show that the capitalization of government-owned banks during recessions smooths the effects of a negative shock and helps the economy recover more quickly. However, these stabilizing effects could be partially offset by banks’ inefficiency in transforming one unit of capital into loans. Therefore, ignoring the heterogeneity between private and government-owned banks may lead to misleading assessments and conclusions regarding the effects of economic policies on the macroeconomic and banking variables. This is particularly important for evaluating the effectiveness of macroprudential policies.

Effects of macroprudential policies on ecological footprint: the moderating role of environmental policy stringency in the top 11 largest countries

This study investigates the impact of macroprudential policies on ecological footprint (EF) in the top 11 largest countries. This study uses country-level panel data from these countries, covering the period from 1992 to 2020. Findings indicate that macroprudential policies alleviates ecological footprint in the sample. Macroprudential policies primarily reduce the ecological footprint before medium quantile (50%) while the environmental benefits of the policies end in the later quantiles. Moreover, environmental policy stringency (EPS) amplifies the positive influence of macroprudential policies on environmental sustainability. Estimate results stay the same with basic regression results in the post-global financial crisis (GFC) period while the impact is positive in the pre-GFC period. Finally, other robust tests validate the findings reported in basic regression model. This study suggests that governments should customize various types of macroprudential policies while also considering environmental concerns. The achievement of a sustainable environment can be facilitated by the combined effects of macroprudential policies and EPS.

The role of macroprudential policies under carbon pricing

This paper analyses the effectiveness of macroprudential policy on macro-financial fluctuations when the government enforces carbon pricing to reduce carbon emissions and achieve the net-zero target. A carbon tax policy alone can reduce carbon emissions by 2030, but at the cost of a deep and prolonged recession, with consequential financial instability due to a higher probability of default on entrepreneurs in the brown sector. This result suggests that carbon pricing should be coupled with complementary policies, such as macroprudential policy. In particular, differentiated LTV ratios and differentiated capital requirements that penalize the brown sector in favour of the green sector tend to decrease the probability of default in the green sector and encourage green lending in supporting the transition to a green economy. However, such policies have little contribution in offsetting the negative impact on the macroeconomy. More stringent levels of prudential regulations are needed to reduce the fall in GDP and consumption. More specifically, the “one-for-one” prudential capital requirements on fossil fuel financing can effectively reduce defaults and move to a greener economy.

Banking on resilience: EU macroprudential policy and systemic risk

This study examines the effectiveness of macroprudential policies on banking systemic risk for 172 European banks across 20 EU countries from 2000 to 2017. Using a dynamic panel framework, it assesses the effectiveness of policy on two dimensions of systemic risk: banks' contribution to aggregate systemic risk (ΔCoVaR) and their vulnerability in stressed markets (Exposure-ΔCoVaR). Results show policy actions reduce bank systemic risk, especially in terms of Exposure-ΔCoVaR. However, this effect varies between tightening and loosening measures. Interestingly, the analysis indicates that policies don't significantly affect banks' contribution to systemic risk as measured by ΔCoVaR. Borrower-based policies and exposure limits in particular enhance bank resilience. This study has important implications for policymakers regarding the calibration and evaluation of macroprudential measures.

Quantile Policy Effects: An Application to US Macroprudential Policy

To assess the dynamic distributional impacts of macroeconomic policy, we propose quantile policy effects to quantify disparities between the quantiles of potential outcomes under different policies. We first identify quantile policy effects under the unconfoundedness assumption and propose an inverse probability weighting estimator. We then examine the asymptotic behavior of the proposed estimator in a time series framework and suggest a blockwise bootstrap method for inference. Applying this method, we investigate the effectiveness of US macroprudential actions on bank credit growth from 1948 to 2019. Empirically, we find that the effects of macroprudential policy on credit growth are asymmetric and depend on the quantiles of credit growth. The tightening of macroprudential actions fails to rein in high credit growth, whereas easing policies do not effectively stimulate bank credit growth during low-growth periods. These findings suggest that US macroprudential policies might not sufficiently address the challenges of soaring bank credit or ensure overarching financial stability.

The effectiveness of macroprudential policies in managing extreme capital flow episodes

AbstractAgainst the backdrop of a proliferation of policy tools in recent years, there is ongoing policy uncertainty surrounding the suitability of capital flow management in mitigating systemic risk and financial disruptions. We study the effectiveness of macroprudential policies in managing extreme capital flow episodes (surges, stops, flight, and retrenchment), comparing them to capital controls and foreign exchange interventions. Using propensity score matching, based on a panel of 54 countries spanning 1990Q1 to 2020Q3, we find that macroprudential policy can reduce the likelihood of extreme capital flow episodes at least as effectively as capital controls or foreign exchange interventions. Their relative effectiveness, however, varies considerably across type of instrument, proliferation of tools, country income‐development level, and type of extreme capital flow episode.

Digging Deeper—Evidence on the Effects of Macroprudential Policies from a New Database

AbstractThis paper introduces a comprehensive database of macroprudential policies, which covers 134 countries from January 1990. Using a novel numerical indicator of the tightness of loan‐to‐value (LTV) regulations, we estimate the policy effects of incremental tightening in LTV limits, employing a propensity score–based method to address endogeneity concerns. The results point to economically significant and nonlinear effects on household credit, with a declining per‐unit impact for larger tightening measures. The analysis indicates that policy leakage effects could be a factor behind the nonlinear effects. We finally find that the side effects of macroprudential policies on consumption and output are relatively small.