Macroprudential Policy Instruments Research Articles

Does prudential capital reduce bank risk-taking? Empirical evidence from the Indonesian banks industry

The implementation of macroprudential supervision, significantly tighter capital regulation in developing economies, has recently been debated, which focuses on reducing bank risk-taking and promoting financial stability in the banking sector. Our study investigates the impact of prudential capital on commercial bank risk-taking in Indonesia. We employed a GMM system approach to analyze bank and macro level data from 2004 to 2019. Our result confirms that appropriate capital regulations for reducing bank risk-taking are heterogeneous. Traditional capital ratios decrease bank risk-taking. However, the risk-based capital ratio shows an unexpected affirmative effect. Implementing macroprudential policy instruments of capital buffer effectively manages bank risk, and so does the regulatory capital pressure variable. The results are intimate for guiding commercial banks' risk management and capital effectiveness.

Loan to Value Ratio, KPR and KPA in Indonesia

The COVID-19 pandemic that occurred at the beginning of 2020 has caused economic growth to decline in many countries, including Indonesia. One of the steps taken with the aim of economic recovery is by increasing the consumption in credit channels or non-credit channels, such as social aid. This thesis discusses loan-to-value ratio effects on property loans, KPR, and KPA in Indonesia. Property loans, KPR and KPA, are included in consumer credits, and loan-to-value ratio is one of the macroprudential policy instruments. The method used in this thesis is Autoregressive Distributed Lag linear regression (ARDL) with property credit, KPR, and KPA as the dependent variable, the dummy variable of the loan-to-value ratio as the independent variables, and consumer credit interest rates, gross domestic product and inflation as the control variables. In addition, the interaction variable between the dummy variable of loan-to-value ratio and consumer credit interest rate is also used. The results showed that the interaction variable between the dummy variable of tightening in loan-to-value ratio and consumer credit interest rate is significant to property loans, KPR, and KPA in the long run. Furthermore, GDP and consumer credit interest rates, which are control variables, are also significant to property loans, KPR, and KPA in the long run

Are macroprudential policy instruments effective? Evidence using difference-in-difference approach with heterogeneous treatment effects

ABSTRACT We empirically investigate the effectiveness of 17 macroprudential policy (MPP) instruments on financial and macroeconomic stability for 98 emerging market and 36 advanced economies between 1990 and 2020. We use Difference-in-Difference estimators with heterogeneous treatment effects which are robust in estimating treatment effects as compared to time and group fixed effects estimators. We find that while in short-term MPP instruments stabilize capital & other investment flows, in longer term, the regulations may increase fluctuations. Further we find that the MPP regulation reduces leverage growth in short-term, however, it may increase leverage growth in longer term. Our results show that broadly, tightening MPP instruments has a stabilizing impact on financial variables. However, the results indicate that MPP may have negative spill-over effects on real GDP growth. The impact on real effective exchange rate depreciation is mixed.

ФІНАНСОВА СТІЙКІСТЬ КОМЕРЦІЙНОГО БАНКУ ЯК НЕОБХІДНА УМОВА ЙОГО ЕФЕКТИВНОГО ФУНКЦІОНУВАННЯ

Financial stability is one of the prerequisites for the effective functioning of the financial market and its participants in today's turbulent conditions. Within the framework of a commercial bank, financial stability means the bank's constant ability to meet its obligations and ensure profitability at a level sufficient for normal functioning in a competitive environment, as well as ensure purposeful development by transforming resources and minimizing risks, withstanding the influence of external and internal environmental factors. The work examines the content and components of financial stability on the example of a commercial bank, and evaluates the factors affecting it. In order to identify the means of its provision, an assessment of financial activity indicators of JSC "Credit Agricole Bank" was carried out. As a result of the analysis of financial reporting indicators, the satisfactory financial condition of JSC "Credit Agricole Bank" was determined, the basic indicators are within the normative values, but due to the high sensitivity to risks, they are unstable. It is noticeable that before the realization of the risk of a full-scale Russian invasion, all indicators of the bank show consistently high values. The assessment of financial stability through the application of a set of analytical techniques made it possible to identify and evaluate the influence of factors and justify management decisions based on the obtained data. Proposed measures to ensure financial stability in the current conditions, which include: maintaining the stability of the resource base of the banking institution, balanced asset management, timely recognition, proper risk management with the aim of eliminating or limiting them are necessary indicators of maintaining the stable activity of a commercial bank in the war period, taking into account the risk its duration and the post-war reconstruction of Ukraine's economy. Strengthening the financial stability of domestic commercial banks and the banking system in general is facilitated by regulatory measures: stress testing and a wide range of NBU macroprudential policy instruments.

Global economic policy Uncertainty, gross capital Inflows, and the mitigating role of Macroprudential policies

We consider the effects of global economic policy uncertainty on capital inflows and the potentially mitigating effect of different macroprudential frameworks and policies on this effect. While macroprudential policies aim to maintain domestic financial stability, they can also affect cross-border capital flows. We use a global panel of 84 economies during 1997–2018, to analyze the relationships among global economic policy uncertainty, macroprudential policies, and gross capital inflows. We find that global economic policy uncertainty impacts negatively on gross capital inflows. The tightening of macroprudential policies, however, can moderate this effect by nearly 30%-40%. Disaggregating macroprudential policy instruments indicates that supply-side tools, especially those related to bank capital requirements, are the most effective. Moreover, heterogeneity exists among different capital inflows; more specifically, portfolio investment is influenced most significantly, while direct and other types of investment remain unchanged. Our results have direct implications for the utilization of macroprudential policies in managing capital inflows.

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.

Analysis of the Effects of Macroprudential Policy Instruments on Commercial Bank Liquidity in Indonesia 2018-2021 Period

Liquidity is an important aspect that can be considered a bank's lifeblood. To maintain business continuity, banks must always manage liquidity effectively. Liquidity easing is one strategy to assist economic growth during the COVID-19 epidemic. Where macroprudential policies are used to ease liquidity restrictions. As a means of promoting economic growth, the government seeks to induce greater lending to debtors. This easing of liquidity, on the other hand, is thought to help maintain bank operations solvent. This easing of liquidity during the pandemic was carried out by reducing the reserve requirement followed by an increase in the MPLB ratio. In addition, Bank Indonesia strengthened RIM by adding an export money order in its calculation. The goal of this research is to look at how macroprudential policy, such as the Statutory Reserves instrument, the Macroprudential Intermediation Ratio, and the Macroprudential Liquidity Buffer, affects the liquidity of traditional commercial banks in Indonesia from 2018 to 2021. The monthly data utilized comes from the Financial Services Authority website, specifically the Indonesian Banking Statistics section. To evaluate the three hypotheses, the researchers employed a multiple linear regression approach utilizing EViews 10 software. First, the Statutory Reserves have a negative and minor influence on commercial bank liquidity, according to the findings. Second, MIR has a good and considerable impact on commercial bank liquidity. Third, MPLB has a considerable negative impact on commercial bank liquidity. Simultaneously, the three independent factors are discovered to have an impact on commercial bank liquidity.

Borrower- and lender-based macroprudential policies: What works best against bank systemic risk?

This paper investigates the complementarity between the different macroprudential policies to contain bank systemic risk. We use a newly updated version of the IMF survey on Global Macroprudential Policy Instruments (GMPI). By disentangling the aggregate macroprudential policy index, we assess the complementarity between borrower-targeted and lender-targeted instruments in mitigating systemic risk arising from intra-financial system vulnerabilities. We investigate the effect of boom-bust cycle on such a relationship by analyzing the financial upturns and downturns and show the effectiveness of the macroprudential policies during calm period. We also show that their efficacy in mitigating instability is quite heterogeneous and may vary depending on the set of tools implemented, as well as bank’ size, TBTF, leverage, liquidity and concentration.Our results bear critical policy implications for implementing optimal macroprudential tools and provide insights into the trade-off between financial vis-à-vis price stability.

How Effective Are Macroprudential Policy Instruments? Evidence from Turkey

This study provides an empirical analysis of the two macroprudential instruments, namely the reserve option mechanism and the interest rate corridor, employed by the Central Bank of the Republic of Turkey in the aftermath of the global financial crisis. A nine-variable structural vector autoregressive model for Turkey is estimated with Bayesian techniques utilising data from October 2010 to May 2018. A set of timing, zero and sign restrictions are imposed to identify the reserve requirement and the interest rate shocks through the bank lending channel. The results reveal that the new policy frame is efficient in curbing the volatility in the exchange rates and in improving the current account balance. While the reserve requirements seem to be more effective on the current account and partly on the exchange rate, the interest rate fares better in controlling the price level.

The Impact of Macroprudential Policy Instruments on Financial Stability in Southern Europe

Abstract This paper is a contribution to the body of research examining the impact of macroprudential policy instruments on financial stability. The following hypothesis was tested (H1): Macroprudential policy instruments (household borrowing costs; interbank loans as a percentage of total loans; loan to deposit ratio; leverage ratio; and solvency ratio) enhance financial stability, as measured by credit growth, in four southern European economies (Greece, Italy, Portugal and Spain) from Q4 2010 to Q4 2018. The empirical results of this study suggest that, of the investigated macroprudential policy instruments, household borrowing costs, interbank loans as a percentage of total loans and loan to deposit ratio exhibit the predicted impact on credit growth rate. Leverage ratio and solvency ratio do not exhibit the expected impact on the response variable. Moreover, only three out of the five explanatory variables are statistically significant in the model. Consequently, it is not possible to confirm or reject the hypothesis based on the available data and results.

Cross-Regional Asymmetric Volatility Connectedness in the Korean Housing Markets

This paper investigates asymmetries in the volatility connectedness of the Korean housing market. For this purpose, we employ the asymmetric connectedness approach proposed by Baruink et al.(2017). While the analysis of Baruink et al.(2017) is based on low dimensional VAR model, we consider 16 regional markets, by using high dimensional LASSO-VAR model. The main results are as follows. First, the total CAM(connectedness asymmetric measure) is estimated at 27.08%, indicating a high asymmetry in the housing market. In particular, the impact of good volatility strictly dominates that of bad volatility. Second, the total CAM shows time-varying patterns, with a surge in December 2020. Third, the contribution of Seoul to the aggregate housing market had gradually decreased since 2010 but started to rise again in 2017. The findings of this study suggest that macroprudential policy instruments are necessary to stabilize the housing market in the face of the recent accumulation of financial imbalance risks.

GREEN BANKING IN KAZAKHSTAN: POTENTIAL, FORMATION, DIRECTIONS OF DEVELOPMENT

The purpose of the research is to analyze the problems and prospects for the development of «green» financing and banking in Kazakhstan and to propose directions for stimulating banks to finance «green» economy projects.Methodology – in the course of the study, the methods of critical analysis, logical generalization, systematization and grouping of information are used. Scientific publications of domestic and foreign authors are the basis of the research.Originality / value of the research – the results of the study can be applied in Kazakhstan in improving the state regulation of responsible activity of banks with a view to stimulating their participation in financing the «green» economy.Findings – the essence of «green» banking is considered and the role of banks in financing projects of the «green» economy is defined; the structure and condition of the banking sector of Kazakhstan are analyzed, and the factors inhibiting the emergence of «green» banking are identified. It is noted that banking regulators, with appropriate public policies, could facilitate the channeling of financial resources to environmental projects by regulating banks, for which monetary policy and macro-prudential policy instruments can be used. It is concluded that development of «green» banking is extremely important for development of «green» technologies, financing of ecologically clean production, ensuring goals of sustainable development of the economy of Kazakhstan.

Macroprudential Transparency and Price Stability in Emerging and Developing Countries

Abstract One of the focuses of recent literature has been the macroeconomic effects of macroprudential policy instruments. The innovation of this paper is that it studies the effects of transparent macro-prudential policies on price stability. The results presented herein provide the first empirical evidence that macroprudential transparency can aid to achieve stable inflation in emerging and developing countries. The effect is necessarily transmitted through reduced occurrence of banking crises. We also record a particular advantage of macroprudential transparency for non-inflation targeting countries. Overall, the results are robust to the use of two proxies of price stability.

Does bank competition matter for the effects of macroprudential policy on the procyclicality of lending?

Competition is an inherent and natural environment in which banks operate and extend loans. Despite the extensive debate on the impact of bank competition on risk-taking and procyclicality, there is no evidence of its role in the effects of macroprudential policy on loan growth and on the sensitivity of lending to the business cycle. Using over 80,000 bank-level observations in 95 countries from 2004 to 2015, we find that increased competition strengthens the countercyclical effects of macroprudential policy instruments (MPIs) in terms of reduced loan growth. Bank lending is procyclical in a perfectly competitive industry. However, any decrease in the intensity of competition in countries not applying MPIs is related to the increased procyclicality of lending. The sensitivity of lending to the business cycle in countries implementing macroprudential policy depends on the type of MPI and the length of use of the instruments. We demonstrate that an extended duration of use of cyclical instruments is associated with increased procyclicality in lending. In a perfectly competitive environment, we find increased procyclicality of credit in countries using cyclical instruments for longer periods, and decreased procyclicality of credit in countries applying balance-sheet-oriented instruments. Under the imperfectly competitive banking sector, we find the opposite effects of macroprudential instruments on the procyclicality of credit.

Macroprudential Policy Versus Other Economic Policies

After the global financial crisis of 2007, macroprudential policy instruments have gained in recognition as a crucial tool for enhancing financial stability. Monetary policy, fiscal policy, and microprudential policy operate with a different toolkit and focus on achieving goals other than the stability of the financial system as a whole. In ligh of this, a fourth policy – namely macroprudential policy – is required to mitigate and prevent shocks that could destabilize the financial system as a whole and compromise financial stability. The aim of this paper is to contrast macroprudential policy with other economic policies and explain why other economic policies are unable to attain financial stability, which in turn justifies the need for a separate macroprudential policy, the ultimate goal whereof is precisely financial stability of the financial system as a whole. Our research results based on the descriptive research method indicate that, in order to prevent future financial crises, it is indispensable to combine both the microprudential and the macroprudential approach to financial stability. This is because the causes of the crises are often such that they cannot be prevented or mitigated by relying only on microprudential or only on macroprudential policy instruments.

BANK CONCENTRATION AND BANKING STABILITY: EVIDENCE FROM EAGLE GROUP

The study was conducted to assess the impact of the banking sector's concentration on the banking system's stability in Emerging and growth-leading economies (EAGLEs). In addition, the study also analyzed the role of macroeconomic factors in bank stability. By applying Bayesian multivariate linear regression, the posterior probability results show that money supply growth and credit growth erode the soundness of the banking system. On the other hand, economic growth helps to improve banking stability, but this effect is not obvious; surprisingly, inflation also increases the banking stability of the Emerging and growth-leading economies. Finally, the study shows that the equity ratio to total assets has a reverse relationship with bank stability. Due to data limitations, this study has not yet examined the role of macroprudential policy instruments in maintaining banking stability. Hence, in future studies, besides the factors considered in this study, we should focus on analyzing the impact of macroprudential policy instruments on banking stability.

Tightening and Loosening of Macroprudential Policy, Its Effects on Credit Growth and Implications for the COVID-19 Crisis

In this study, we analyze the effects of macroprudential measures on bank lending in the European Union. We develop several dedicated macroprudential policy indices reflecting different policy actions taken by the authorities in individual member countries, with the aim to affect credit activity in national banking sectors. In our empirical model, we measure responsiveness of gross loans in banks to selected macroprudential policy indices, taking into account a set of bank level and macroeconomic control variables. We use the Fitch Connect bank level dataset with financial statements for 3,434 European banks with 18,616 observations and macroeconomic data provided by the World Bank and IMF statistics covering the period between 2000 and 2017. Information on the use of macroprudential instruments is taken from a new macroprudential policy database, MaPPED, gathered and published by European Central Bank, where we were able to extract the information on both timing and the direction of use of the macroprudential policy instruments. Our findings show that macroprudential instruments can be used effectively for regulatory modulation of credit activity in banks, with some fluctuations in the level of the effectiveness through the business cycles. Therefore, in loosening cycles, macroprudential measures are found to be strongly and positively associated with bank lending. On the other side, tightening actions are found to have a downward effect on bank lending, while these effects are less pronounced. These results are of great importance in the current crisis arising from the impact of COVID-19, as policymakers are trying to support the economy by easing macroprudential regulatory constraints to ensure lending to the real sector.

Macroprudential measures and developments in bank funding costs

In this paper, we study how the use of macroprudential policy instruments is associated with bank funding costs. To accomplish this, we develop several macroprudential indices based on policy objectives and include different macroeconomic and bank-level variables, while we also separately analyse the cost of debt and overall cost of funding. Our analysis relies on bank-level data in 43 European countries for the period between 2000 and 2017, and a macroprudential policy dataset based on an IMF survey. The results show the activation of macroprudential policies is chiefly related with lower bank funding costs, with this association being stronger for developed countries than emerging ones. The results also reveal positive links with certain macroprudential measures to bank cost of funding, offering further insight into the repercussions of calibrating and selecting macroprudential tools.

The Impact of Seven Macroprudential Policy Instruments on Financial Stability in Six Euro Area Economies

Abstract The aim of this paper is to investigate whether macroprudential policy instruments can influence the credit growth rate and hence financial stability. We use a fixed effects panel regression model to test the following hypothesis for six euro area economies (Austria, Finland, Germany, Italy, Netherlands and Spain) during time span 2010 Q3 to 2018 Q4: “Macroprudential policy instruments (degree of maturity mismatch; interbank loans as a percentage of total loans; leverage ratio; non-deposit funding as a percentage of total funding; loan-to-value ratio; loan-to-deposit ratio; solvency ratio) enhance financial stability, as measured by credit growth”. Our empirical results suggest that the degree of maturity mismatch, non-deposit funding as a percentage of total funding, loan-to-value ratio and loan-to-deposit ratio exhibit the predicted impact on the credit growth rate and therefore on financial stability. On the other hand, interbank loans as a percentage of total loans, leverage ratio, and solvency ratio do not exhibit the expected impact on the response variable. Since only four regressors (out of seven) have the signs predicted by our hypothesis, we can only partly confirm it.

Macroprudential regulations and systemic risk: Does the one-size-fits-all approach work?

This study empirically investigates whether systemic risk varies among countries with different income levels in response to macroprudential policy instruments (MPIs). The results suggest a negative association between overall MPIs and systemic risk using a sample of 68 countries covering the period between 2000 and 2017. However, not all instruments show intended stability benefits, especially for low and lower-middle-income economies. A comparative analysis reveals that upper-middle-income and high-income countries do receive stability benefits from MPIs. However, low and lower-middle-income economies show unintended instability costs in connection with MPIs, suggesting that a one-size-fits-all approach to macroprudential regulations is not beneficial. Low and lower-middle-income countries should carefully ascertain the choice, implementation, and monitoring of macroprudential policies.