Macroprudential Regulation Research Articles

Taxing versus subsidizing debt under financial frictions

AbstractWe examine optimal credit market policies in two models with durables/capital as collateral. Pecuniary externalities rationalize ex-ante debt taxes as macroprudential regulation, achieving constrained efficiency. Ex-post debt subsidies can implement first-best by stimulating collateral demand. Due to the same effect, debt subsidies that are constant over time can be superior to debt taxes. Saving subsidies can further enhance efficiency by addressing distributive effects of pecuniary externalities via interest rate reductions. The analysis shows that debt-increasing subsidies can outperform macroprudential regulation, and that constrained inefficiency caused by collateral externalities is insufficient to establish debt taxes as optimal credit market policies.

Macroprudential regulation, bank stability, and the credit market in Kenya

Macroprudential regulation, bank stability, and the credit market in Kenya

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.

Analysis of Monetary policy in Muslim Majority Countries: Tunisia

This research aims to analyze the monetary policy of Tunisia, a country with a Muslim-majority population, from both conventional and Islamic perspectives. Monetary policy, under the responsibility of the Central Bank, seeks to maintain currency stability and ensure overall economic strength. Islamic monetary policy specifically incorporates principles such as the prohibition of usury (riba), currency stability, the avoidance of excessive speculation, promoting productive financing, distributive justice, inflation control, and transparency. Tunisia, with its majority Muslim population, provides an interesting case for examining how Islamic principles are reflected—or not—in its monetary policy. This study employs a descriptive qualitative methodology, utilizing secondary data from library research, including websites and scientific journal articles. The findings show that Tunisia's monetary policy has a significant impact on economic indicators such as price stability, currency value, and overall economic growth, contributing to benefits like increased employment, higher purchasing power, improved investment levels, and sustainable economic prosperity. Key tools include interest rates, open market operations, reserve requirements, foreign currency interventions, selective credit policies, and macroprudential regulations.

Balancing financial stability and economic growth: a comprehensive analysis of macroprudential regulation

Balancing financial stability and economic growth: a comprehensive analysis of macroprudential regulation

Open-economy macroeconomics with financial frictions: A simple model with flexible exchange rates

A simple macroeconomic model with banking, financial frictions, and flexible exchange rates is used to study the performance of fiscal, monetary and macroprudential policy combinations in response to domestic and external shocks. After characterizing the transmission process of each instrument, a diagrammatic analysis of how these policies should be used, either individually or jointly, to promote economic and financial stability, is provided. The analysis shows that whether a policy should be assigned to internal or external balance, and whether it should be contractionary or expansionary, depends not only on the nature of the shocks impinging on the economy but also on the range of tools available to policymakers and the strength of financial frictions. In particular, in response to an external financial shock, monetary policy should be assigned to external balance, and fiscal policy or macroprudential regulation to internal balance. These two policies are substitutes when used in combination with monetary policy.

Nghiên cứu tác động của chính sách an toàn vĩ mô tới khả năng sinh lời- Bằng chứng thực nghiệm tại các ngân hàng thương mại Việt Nam

This paper investigates the impact of macroprudential policies on the profitability of 27 Vietnamese commercial banks from 2014:Q3 to 2023:Q3. This paper uses panel data regression methods combined with tests to resolve the endogeneity issue, and robustness checks produce consistent research results. Accordingly, empirical results show that contractionary macroprudential policies have a positive impact on the profitability of Vietnamese commercial banks. The results from the quantile regression model indicate that contractionary macroprudential policies help commercial banks with low ROA quantiles improve profitability better than banks with high ROA quantiles. Based on that, this research forms several recommendations including: the banks should conduct appropriate strategies to align to macroprudential regulations; the State Bank of Vietnam is in charge of the banks in complying to these regulations.

Does macro-prudential regulation lead to low interest rate? An empirical analysis based on the transnational panel model

Based on a simple theoretical analysis, this paper constructs a transnational panel model based on the macroeconomic variable data of 131 countries from 2007 to 2020 for empirical analysis, so as to systematically explore the potential impact of macro-prudential policy regulation on the evolution of interest rates. It is found that the nominal interest rate of developed economies is closer to the lower bound of interest rate than that of underdeveloped economies, and the implementation of macro-prudential policies in the world generally shows a tightening trend, and the tightening degree of macro-prudential policies in developed economies is higher. Macro-prudential regulation has significantly exacerbated the evolution of global low interest rates, but the interest rate evolution of different types of economies is heterogeneous under the influence of macro-prudential regulation, especially in developed economies. Based on these insights, the paper proposes several policy recommendations: firstly, strengthen the precision of the implementation of macro-prudential policies to avoid “one-size-fits-all” policy implementation; secondly, refine macro-prudential policy regulation to be more scientific and prevent policy overshoots that could inadvertently harm the real economy; thirdly, attach great importance to the potential constraints of the low interest rate environment, and use diversified means to get rid of the lower bound of the nominal interest rate.

Reining in the riskiest? Evidence of non-linear impacts of macroprudential regulations on bank systemic risk in China

We investigate the impact of macroprudential regulations on systemic risk in Chinese banks. Applying the approach of unconditional quantile regressions to a panel dataset of major Chinese banks from 2002 to 2018, we find supportive evidence for non-linear impacts of macroprudential regulations in mitigating the systemic risk of banks. Specifically, the risk-reducing effects of macroprudential regulations increase with the distributional quantiles of bank systemic risk, implying that macroprudential regulations may be implemented more rigorously on banks with a greater potential to influence systemic stability.

Legal Aspects of Macroprudential Regulation within the EU and the EAEU

Introduction. The article examines the legal evolution of the regulation of the activities of the European Systemic Risk Board (hereinafter – ESRB) in the context of the formation of the organizational and legal mechanism of financial integration, and also assesses the reform of the legal acts in the context of building the Capital Markets Union. The paper reveals the results of comparative analysis of the legal foundations of the implementation of macroprudential policy in the EU and EAEU, identifying common and special features in the legal regulation of integration associations.Materials and methods. In the course of research, the following methods of scientific cognition were used: analysis, synthesis, abstraction, generalizations, analogies and others. The methodological basis of research consist of general scientific as well as special-legal methods, including method of dogmatic analysis (interpretation of legal norms, legal and technical constructions, etc.), formal, comparative legal methods.Results of the study. The analysis of the legal basis of the implementation of macroprudential supervision in the EU and the EAEU showed a significant extent of the financial integration in the EU, as testified by the presence of a supranational body, ESRB. However, at this moment there is stagnation in the development of legal regulation of ESRB activities. In the EAEU, in its turn, despite the existence of the legal foundation of regulation, macroprudential supervision is executed by the means of intergovernmental cooperation, and not supranational regulation.Discussion and conclusion. The study showed the existence of significant differences in the legal regulation of macroprudetial supervision in the EU and the EAEU as well as it was revealed that in the absence of comprehensive supranational regulation of the macroprudential supervision in the EAEU, there is potential for the development of a respective institution in the EAEU law.

International Experience and Reference of China's Financial Regulatory System Reform

Since the 1970s, in order to reduce financial risks in the context of fast-paced growing financial industry, China has been implementing reforms to its financial regulatory structure. In 2023, the State Administration for Financial Supervision and Administration was officially established, bringing China closer to mixed industry regulation. Currently, there are multiple types of financial regulation on a global scale, including segmented regulation, single regulation, functional regulation, and bimodal regulation. Given the rapid development of China's financial market, it is imperative to draw on better international expertise, innovate domestic regulatory framework, and persist pursuing bimodal regulatory mode under the mixed industry background. By implementing the bimodal regulation of macro prudential regulation and micro behavioral regulation, China is managing to control financial risks, protect investors lawful rights and interests, and foster the long-term and stable expansion of China's financial industry

Financial stability: A scientometric analysis and research agenda

The study of financial stability is a highly expansive and significant area of academic inquiry. However, traditional literature reviews are often constrained in their scope as they tend to provide fragmented insights from a subset of the overall corpus of financial stability. In order to bridge this existing knowledge gap, the objective of this study is to undertake a comprehensive review on a large scale, with the aim of offering an up-to-date analysis of the performance and intellectual framework concerning the broad concept of financial stability. The present study undertakes a comprehensive examination of the existing body of literature on financial stability, employing a scientometric survey methodology to analyze scholarly research in this field. The study proposes a research agenda based on two prominent developments identified in the field: systemic risk and macroprudential policy. These findings highlight the importance of conducting additional studies on how various factors affect the sustainability of financial security and risk, such as the financial hazards associated with climate change. There is also an emphasis on macroprudential policy and its possible role in preserving financial security. To maintain macroeconomic stability, we recommend that macroprudential policy should be employed to deal with systemic risk and the credit/financial cycle. We recognize the need for further research into the proper calibration of macroprudential instruments and the limited empirical evidence on the effectiveness of macroprudential regulation. To fully grasp the dynamics at play between climate change, financial stability, and macroprudential policy, the article concludes with a need for a multidisciplinary approach.

Financial cycle comovement with monetary and macroprudential policy and global factors: Evidence from India

This paper assesses the interaction of the financial cycle with domestic and global factors. We assess the comovement of monetary and macroprudential policy stance towards financial cycle phases in India and analyze the external influence of two major global economies, the US and China, from 1990 to 2021. To measure the financial cycle, we use credit and equity prices derived from the low-frequency decomposition of wavelet analysis. The analysis suggests that the amplitude of the downturn phase is much smaller than the upswing phase, suggesting the downturn phase of the financial cycle is considerably milder in India. Results indicate that the procyclicality of monetary policy and macroprudential regulations dominates throughout the upward phase of the financial cycle. Further, the interest rate spectrum, short, intermediate, and extended-term rates are discovered to move together. Also, the monetary and macroprudential policies complemented one another throughout the sample period, indicating the effectiveness of these policies in dampening financial imbalances. Based on wavelet coherency analysis, the results of global factors indicate that India shares a long and stable credit relationship with the US. This credit relationship has weakened with China in post-global financial crisis. In comparison, the Indian equity market displays a strong relationship with the US and the Chinese equity markets only during the financial crisis and remains insulated during normal periods. These results thus suggest that in an emerging market economy like India, credit growth in the US creates significant long-term effects, whereas only during crisis periods do the equity markets of the US and China create financial instability in India.

Loan loss provisions and income smoothing in banks: the role of trade openness and IFRS in BRICS

PurposeThis paper empirically investigates whether trade openness (TO) in Brazil, Russia, India, China and South Africa (BRICS) countries affects how banks might employ loan loss provisions (LLPs) to smooth out their earnings and how adopting the International Financial Reporting Standards (IFRS) can mitigate it.Design/methodology/approachThe analysis includes 78 commercial banks from five BRICS nations and spans 2014 through 2020. To test these hypotheses, the authors utilized a fixed-effect and two-step system panel generalized methods of moments (GMM) estimator.FindingsTO positively affects income smoothing (earnings management) across BRICS commercial banks. The effect is clearer in banks that make financial reports under the IFRS. Path analysis reveals that the effect of TO is driven by nonperforming loans (NPLs). Additionally, the IFRS restricts earnings management in the BRICS banking sector when a better institutional environment is present. The authors found that accounting rules (IFRS) and enforcement (better institutional settings) interact to enhance earnings’ quality.Practical implicationsThe relationship between TO and bank earnings management practices is important for understanding the complex interplay between trade and finance and ensuring financial stability, investor confidence and regulatory compliance. This study recommends better regulations and governance mechanisms for financial reports in emerging nations like BRICS. Additionally, macro-prudential regulators and banking supervisors should work closely to ensure transparent TO decisions with improved discipline, institutional quality and regulatory support to enhance bank stability.Originality/valueThe study finds evidence of bank income smoothing in the BRICS and introduces TO as a determinant. It also identifies the evolving role of IFRS in the presence of higher institutional quality and TO, thereby expanding the financial reporting literature.

Практика применения инструментов макропруденциального регулирования Банка России

The types and classifications of tools of macroprudential regulation of the Bank of Russia, their purpose in maintaining the financial stability of the state and reducing systemic risks are considered. The performance indicators of the Russian banking sector are analyzed, reflecting the results of using macroprudential regulation tools of the Central Bank of the Russian Federation. The authors’ conclusions are formulated on the directions of development of macroprudential regulation of the Bank of Russia in relation to the country’s banking sector.

МАКРОПРУДЕНЦИАЛЬНЫЕ ИНСТРУМЕНТЫ УПРАВЛЕНИЯ СИСТЕМНЫМ РИСКОМ НА ФИНАНСОВОМ РЫНКЕ РОССИИ

The article is devoted to the analysis and assessment of the mechanism reventing the occurrence of systemic risk in the Russian financial system through the tools of macroprudential regulation. The degree and spheres of influence of macroprudential regulation tools on the sources of systemic risk are investigated. A scientific hypothesis in achieving financial stability through the tools of macroprudential regulation. Conclusions are drawn about the effectiveness of the tools used in modern Russian practice, an assessment of the prevention of systemic risk in the segments of unsecured and mortgage lending, the foreign exchange market, as well as the adequacy of capital and reserves of the financial system due to macroprudential instruments is carried out, directions for the development of individual elements of the financial stability regulation mechanism are proposed.

Macroprudential policy in retail lending: Concept and results – a case study of the Bank of Russia

Macroprudential regulation of the banking system is a significant instrument for ensuring the financial stability of the state. Unsecured consumer lending is growing at a steadily high rate (in August-October 2022, the average monthly debt growth was 0.9%), and it remains a priority segment for banks because of its high margins. The share of unsecured consumer loans provided to borrowers with debt burden indicator (DBI) of more than 80% amounted to more than 32% in the third quarter of 2022 (28% in the second quarter of 2022). The share of consumer loans for a term of more than 5 years remains at a high level (15% in July-September 2022). The share of MFO loans issued to borrowers with a DBI of more than 80% was 41% in the second quarter of 2022 (38% in the first quarter of 2022). A further increase in the citizens’ debt burden in the context of the economy restructuring may create additional macroeconomic risks. Problems of citizens with servicing loans and borrowings can lead to a reduction in demand in the economy, and losses of banks as a result of writing off “bad” loans can lead to a decrease in their ability to lend to the economy. To limit the risks associated with an increase in the citizens’ debt burden, since the first quarter of 2023, the Bank of Russia has established direct quantitative restrictions on the issuance of certain types of credits (loans) and the application of increased buffers to risk coefficients if creditors exceed established limits. This article discusses the main approaches to implementation of the macroprudential policy of the Central Bank of the Russian Federation, its goals and instruments, and peculiarities of application in the current conditions.

Disinflation costs and macroprudential policies: real and welfare effects

PurposeThis paper analyzes real and welfare effects of a permanent change in inflation rate, focusing on macroprudential policy’ role and its interaction with monetary policy.Design/methodology/approachWhile investigating disinflation costs, the authors simulate a medium-scale dynamic general equilibrium model with borrowing constraints, credit frictions and macroprudential authority.FindingsProviding discussions on different policy scenarios in a context where still it is expected high inflation, there are three key contributions. First, when macroprudential authority actively operates to improve financial stability, losses caused by disinflation are limited. Second, a Taylor rule directly responding to financial variables might entail a trade-off between price and financial stability objectives, by increasing disinflation costs. Third, disinflation is welfare improving for savers, while costly for borrowers and banks. Indeed, while savers benefit from policies reducing price stickiness distortion, borrowers are worried about credit frictions, coming from collateral constraint.Practical implicationsThe paper suggests threefold policy implications: the macroprudential authority should actively intervene during a disinflation process to minimize costs and financial instability deriving from it; policymakers should implement a disinflationary policy stabilizing also output; the central bank and the macroprudential regulator should pursue financial and price stability goals, separately.Originality/valueThis paper is the first attempt to study effects of a permanent inflation target reduction in focusing on the macroprudential policy’ role.

Macro-prudential regulations and systemic risk: the role of country-level governance indicators

Macro-prudential regulations and systemic risk: the role of country-level governance indicators

Macroprudential regulation and bank risk: The role of shareholders' and creditors' rights

This paper analyzes whether the effect of macroprudential policies on bank risk is channeled through investors' protection using panel data from a sample of 624 banks from 40 countries. We show that investors' protection plays a significant role in the effect of macroprudential policies on bank risk, which translates into higher efficiency for macroprudential policies in countries with highly protected creditors, whereas there is a loss of effectiveness in countries where shareholders are highly protected. We provide further evidence that the impact of loosening a macroprudential policy is asymmetric (and more pronounced) compared with the adoption or tightening of a macroprudential policy.