Effectiveness Of Macroprudential Policies Research Articles

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.

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.

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 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.

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.

Financial Openness, Bank Systematic Risk, and Macroprudential Supervision

International experiences have underscored the dual implications of financial openness. Given China’s unique circumstances and its escalating level of financial openness, it is crucial to assess potential impacts on the country’s bank systemic risk. This paper uses the quarterly data of 37 listed banks in China from 2010 to 2022 to explore the relationship between financial openness and systemic risk of the banking system, the mechanism of action, and the moderating effect of macroprudential policy on the two. The findings indicate an inverted “U”-shaped correlation between financial openness and bank systemic risk. On one side of this shape, financial openness primarily exacerbates funding mismatch, thereby increasing the systemic risk of banks. Conversely, on the other side, it primarily alleviates systemic risk by optimizing capital management. Moreover, with the help of macroprudential supervision, the inverted “U”-shaped relationship between financial openness and bank systemic risk leads to a lower level of systemic risk and, at the same time, promotes the early arrival of the inverted “U”-shaped inflection point between financial openness and bank systemic risk. Notably, the impact of financial openness on the systemic risk of joint-stock commercial banks, urban commercial banks, and rural commercial banks is more significant. The above research results provide a regulatory reference for effectively preventing and resolving systemic risk while achieving high-quality openness to the outside world. In deepening financial openness, the banking industry needs to pay attention to the funding mismatch and the efficiency of capital management and implement differential risk supervision and prevention mechanisms for banks with different ownership, which is conducive to the reduction of bank systematic risk.

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.