Macroprudential Policy Tools Research Articles

Assessing the cyclical behaviour of bank capital buffers in a finance-augmented macro-economy

This paper empirically analyses how the banks’ capital buffers change with the business cycle. We extract the cycle component using univariate and multivariate filters to document how buffers behave. We also account for the impact of financial factors on capital buffers over the business cycle. Using a large panel of banks for the period 2000–2014, we document evidence that once we account for the impact of financial factors on the business cycle, capital buffers behave more pro-cyclically than previously found in the literature. Furthermore, we provide evidence that large commercial banks react differently to business cycle movements compared to small banks. Overall, these results have important implications for the development of macroprudential policy tools for the global financial system.

The Interaction Between Conventional Monetary Policy and Financial Stability: Chile, Colombia, Japan, Portugal and the UK.

The relationship between monetary policy and financial stability has gained importance in recent years as Central Bank policy rates neared the zero-lower bound. We use an SVAR model to study the impact of monetary policy shocks on three proxies for financial stability as well as a proxy for economic growth. Monetary policy is represented by policy rates for the emerging market economies and shadow rates for the advanced economies in our paper. Our main results show that monetary policy may be used to correct asset mispricing, to control fluctuations in the real business cycle and also to tame credit cycles in the majority of cases. Our results also show that for the majority of cases, in line with conventional wisdom, local currencies appreciate following a positive monetary policy shock. Monetary policy intervention may indeed be successful in contributing to or achieving financial stability. The results, however, show that monetary policy may not have the ability to maintain or re-establish financial stability in all cases. Alternative policy choices such as macroprudential policy tool frameworks which are aimed at targeting the financial system as a whole may be implemented as a means of fortifying the economy.

On the Limits of Macroprudential Policy

Abstract This paper studies how macroprudential policy tools applied to the housing market can complement the interest rate-based monetary policy in achieving one additional stabilization objective, defined as keeping either economic activity or credit at some exogenous (and possibly time-varying) levels. We show analytically in a canonical New Keynesian model with housing and collateral constraints that using the loan-to-value (LTV) ratio, tax on credit or tax on property as additional policy instruments does not resolve the inflation-output volatility tradeoff. Perfect targeting of inflation and credit with monetary and macroprudential policy is possible only if the role of housing debt in the economy is sufficiently small. The identified limits to the considered policies are related to their predominantly intertemporal impact on decisions made by financially constrained agents, making them poor complements to monetary policy, which also operates at an intertemporal margin. These limits can be overcome if macroprudential policy is instead designed such that it sufficiently redistributes income between savers and borrowers.

Uncertainty, macroprudential policies and corporate leverage: Firm-level evidence

This paper investigates the impact of macroprudential policies and uncertainty of economic environment on corporate leverage dynamics over the last decade. This is the first study to investigate the impact of macroprudential policies and uncertainty on leverage dynamics of Turkish non-financial firms using firm-level data. We argue in this paper that persistence of uncertainty should be a more appropriate factor affecting credit dynamics rather than uncertainty. In that sense, we construct a measure of uncertainty by using principal component analysis and a measure of persistence of uncertainty for Turkey. Results from the dynamic panel models with a large set of control variables, provide significant evidence in support of the argument that leverage decisions are affected from the persistence of uncertainty rather than the uncertainty itself. Moreover, both the share of the financial debt in total liabilities and the leverage of Turkish non-financial firms decrease significantly when uncertainty increases persistently and when macroprudential policy tools are tightened. Most strikingly, this is the case only for Small and Medium-Sized Enterprises but not for large firms.

Optimal macroprudential regulation tools

Subject. This article examines the hypothesis that microprudential and monetary policies are not able to provide measures to prevent excessive lending and guarantee the ability of financial institutions to cope with the growing credit bubble. Objectives. The article examines approaches to identifying viable macroprudential policy options and an optimal set of regulation instruments. Methods. For the study, I used a content analysis and generalization. Results. The article presents some results of the assessment of certain macroprudential requirement instruments. Conclusions. The study shows that some macroprudential policy tools can reduce systemic risks associated with credit cycles. Monetary policy alone is not able to effectively withstand the credit bubble risk. All financial policy instruments must be taken and considered together, as they work closely together.

Shadow Bank Run, Housing and Credit Market: The Story of a Recession

Abstract This paper assesses the interaction between the housing and credit markets and shadow banks, with the possibility of bank runs. The findings illustrate how a negative TFP shock is amplified by macro-financial and macro-housing channels through household balance sheets, bank balance sheets, and liquidity channels. If the shock renders the shadow banking system insolvent, two equilibria coexist: the no-run equilibrium and the run equilibrium. In this instance, run is a sunspot coordination failure; if households receive a negative signal from fundamentals and stop rolling over deposits to the financial sector, banks are not able to fund their losses with new deposits. So they are forced to liquidate their assets at an endogenous fire sale price. The main finding of this paper is that the model with housing provides a comprehensive account of the consequences of economic crises, namely the house price double-dip, the output downward spiral, and the lengthy recovery period. To eliminate the bank-run equilibrium, this paper proposes macroprudential policy tools in the form of capital adequacy buffers and loan-to-value ratios. Then a welfare analysis is applied to determine the optimal policy mix.

Managing Nature-Related Financial Risks: A Precautionary Policy Approach for Central Banks and Financial Supervisors

This paper considers how financial authorities should react to environmental threats beyond climate change. These include biodiversity loss, water scarcity, ocean acidification, chemical pollution and — as starkly illustrated by the COVID-19 pandemic — zoonotic disease transmission, among others. We first provide an overview of these nature-related financial risks (NRFR) and then show how the financial sector is both exposed to them and contributes to their development via its lending, and via the propagation and amplification of financial shocks. We argue that NRFR — being systemic, endogenous and subject to ‘radical uncertainty’ — cannot be sufficiently managed through ‘market- fixing’ approaches based on information disclosure and quantitative risk estimates. Instead, we propose that financial authorities utilise a ‘precautionary policy approach’, making greater use of qualitative methods of managing risk, to support a controlled regime shift towards more sustainable capital allocation. A starting point would be the identification and exclusion of clearly unsustainable activities (e.g. deforestation), the financing of which should be discouraged via micro- and macro-prudential policy tools. Monetary policy tools, such as asset purchase programmes and collateral operations, as well as central banks’ own funds, should exclude assets linked to such activities.

Macroprudential policy and financial stability, role and tools

The aim of macroprudential policy is to ensure financial stability by avoiding the outbreak of banking crises, which have a dangerous effect on the economy. Is macroprudential policy effective in the face of banking crises and systemic risks? The macroprudential policy has received significant interest from policy-makers and researchers. A few developing countries were using macroprudential policy tools well before the 2008 financial crisis, but significant progress has been made thereafter in both emerging and industrialized economies to put in place specific institutional settings for macroprudential policy. The fundamental objective of macroprudential policy is to maintain the stability of the financial system by making it more resistant and preventing the risk build-up. The objective of this paper is to analyze the important role of macroprudential policy in ensuring overall financial stability. Since the financial crisis of 2008, macroprudential policy has been increasingly used across economies. These measures aim at smoothing financial cycles and thereby mitigating the impact on the real economy, thereby allowing monetary policy to focus on price stability and promote growth and full employment. Macroprudential policy instruments fall into two categories, depending on their purpose, namely, to prevent procyclicality or to enhance the resilience and soundness of the financial system against shocks. The first category of instruments is used to stop bubbles from forming and smooth cycles, i.e. to force the debt-equity of economic operators on an income basis to prevent unsustainable credit bubbles, or to require dynamic loss provisioning rules. The second category of macro-prudential policy is to improve the resilience to shocks, such as capital surcharges for systemic institutions or the requirement to hold liquid assets to cope with market panics, and to make the financial system less complex. Keywords: macroprudential policy, financial stability, tools and measures, systemic risks.

The Effects of the Macroprudential Policies on Turkish Banking Sector1

Purpose – The aim of the research is to test the effectiveness of macroprudential policies that contain different instruments and help to ensure financial stability in Turkey. Design/methodology/approach – The Central Bank of Turkey (CBRT) and the Banking Regulation and Supervision Agency (BRSA) implemented macroprudential policies such as active use of Debt to Income (DTI), Loan to Value ratio (LTV), required reserve ratios, capital requirement, foreign currency lending limits, credit growth limits, interest rate corridor in order to mitigate financial vulnerabilities. These effects have been analyzed and tested with the econometric time series methods in the paper. The data consist banking groups that are Turkish banking sector, deposit banks, development&investment banks. Results – Empirical findings show that tightening macroprudential policies reduce the loan growth of the Turkish Banking sector and deposit banks. However, the magnitude of this effect is relatively small. Unlike these findings, the effects of macro-prudential tools on the loan growth for the Turkish Development&Investment Banks are not significant statistically. Discussion – Aftermath of the global crisis, the new monetary policy, which doesn’t have traditional features, started to be implemented from the middle of 2010 and has been going on as of the beginning of 2019 in Turkey. Accordingly, the Central Bank of Turkey (CBRT) has determined financial stability as a goal in addition to price stability in the framework of the new monetary policy and it has carried out and developed new tools in accordance with this secondary objective. This application has been carried out in coordination with (BRSA). The new monetary policy of the CBRT and the macro-prudential policies of the BRSA mutually aimed to mitigate financial vulnerabilities and provide financial stability in Turkey. When we examine and interpret the empirical results, we can say that the macro-prudential policy tools affect a certain degree of credit growth in the whole banking system. However, this effect is not very strong.

Does change in the market structure have any impact on different types of bank loans in the EU?

The aim of this paper is to investigate the issue of asymmetry of credit market determinants of bank loans (corporate, consumer, and residential mortgage loans) between the CEE-11 countries (Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia, Romania) and other EU countries (Austria, Belgium, Denmark, Finland, France, Greece, Italy, Spain, the Netherlands, Ireland, Luxembourg, Germany, Portugal, Sweden, United Kingdom, Malta, and Cyprus) after the global financial crisis (GFC) of 2007–09 in the context of market structure and foreign bank presence. Using the dynamic panel model, this study finds differences in the determinants of growth in loans for two groups of countries after the global financial crisis. Furthermore, a panel data analysis of CEE-11 countries against other EU countries also finds differences between determinants of different types of bank loans. The influence of foreign capital and concentration on credit growth is different depending on the type of loans. Finally, this paper complement the evidence for support for sectoral and country specific approach in a macroprudential policy tools.

Effectiveness of Macroprudential Policies under Maturity Mismatch

ABSTRACT This paper studies the role of reserve requirements as a macroprudential policy tool in China. In a factor-augmented vector autoregression of China, we find that banking system works as a shock absorber. To explain this “financial attenuator” effect, we extend an otherwise standard New-Keynesian model including (i) a banking sector with financial frictions with households, (ii) a credit in multi-period contracts, (iii) a central bank that conducts monetary policy by adjusting the nominal interest rate in response to the money-growth rate, and (iv) the reserve requirement (RR) as a macroprudential policy instrument. The quantitative analysis of the estimated model shows that the presence of a maturity mismatch makes a bank’s leverage less procyclical, which offsets the effects of financial frictions and makes the bank’s balance sheet function as a shock absorber. Our analysis also suggests that countercyclical RR adjustment can enhance welfare compared to fixed an RR ratio in the presence of a maturity mismatch but faces important implementation challenges. In particular, an RR policy countercyclically responding to bank lending can effectively stabilize the economy but increase financial fragility, as the “credit attenuator” effect stemming from the maturity mismatch will be offset by this policy.

The macroeconomic impact of shocks to bank capital buffers in the Euro Area

Abstract While the global financial crisis revealed a need for macroprudential policy tools to mitigate the build-up of risk in the financial system, the impact of such policies on the banking sector and the macroeconomy remains largely uncertain. We contribute to the empirical literature that estimates the impact of shocks to bank capital buffers on bank lending and the macroeconomy by estimating a Bayesian VAR model identified with sign restrictions. We use bank-level data for large euro area listed banks to construct an aggregate bank capital buffer for the euro area, which is included as another variable in the model. We estimate three shocks affecting the euro area economy, namely a demand shock, a monetary policy shock and a shock to bank capital buffers. We find that banks curtail lending and reduce their relative exposure to riskier assets in response to a shock to the bank capital buffer. Historical shock decomposition analysis shows that shocks to bank capital buffers have contributed to impair bank lending growth and to widen bank lending spreads, hence depressing economic activity.

Financial Markets and Monetary Policy: A Review of Issues, Theories, Methodology and the Way Forward

The monetary policy-financial market nexus has received renewed interest following the recent global financial crises. The study surveys monetary policy and financial market research in developing countries and emerging economies over an eight year period. To do this, the Journal of Economic Literature (JEL) Classification System is reconfigured to produce a relevant frame of themes for the review. The review is based on 130 peer reviewed articles. The paper highlights the areas of greatest interest and those that have received relatively little attention to date. The suggested areas for future research include: Issues; macro-prudential policy tools and their application, non-bank financial institutions and monetary policy, and the corporate finance-corporate governance-monetary policy nexus; Method; incorporating mixed and qualitative methods; Theory; theory of informal credit channel, and adapting dynamic stochastic equilibrium models to developing country context.

Non-Performing Loans, Governance Indicators and Systemic Liquidity Risk: Evidence From Greece

In this study we propose a new determinant of non-performing loans for the case of the Greek banking sector. We employ aggregate yearly data for the period 1996- 2016 and we conduct a Principal Component Analysis for all the Worldwide Governance Indicators (WGI) for Greece, aiming to isolate the common component and thus to create the GOVERNANCE indicator. We find that the GOVERNANCE indicator is a significant determinant of Greek banks’ non-performing loans indicating that both political and governance factors impact on the level of the Greek non-performing loans. An additional variable that also has a statistically significant impact on the level of Greek non-performing loans, when combined with WGI in the dynamic specification of our model, is systemic liquidity risk. Our results could be of interest to policy makers and regulators as a macro prudential policy tool.

Non-Performing Loans, Governance Indicators and Systemic Liquidity Risk: Evidence from Greece

In this study we propose a new determinant of non-performing loans for the case of the Greek banking sector. We employ aggregate yearly data for the period 1996-2016 and we conduct a Principal Component Analysis for all the Worldwide Governance Indicators (WGI) for Greece, aiming to isolate the common component and thus to create the GOVERNANCE indicator. We find that the GOVERNANCE indicator is a significant determinant of Greek banks’ non-performing loans indicating that both political and governance factors impact on the level of the Greek non-performing loans. An additional variable that also has a statistically significant impact on the level of Greek non-performing loans, when combined with WGI in the dynamic specification of our model, is systemic liquidity risk. Our results could be of interest to policy makers and regulators as a macro prudential policy tool.

Locke’s Second Treatise and Hegel’s Two Critiques ― Systematical Reading on Hegel’s On Natural law and Science of Logic

Locke’s Second Treatise and Hegel’s Two Critiques ― Systematical Reading on Hegel’s On Natural law and Science of Logic

Macroprudential Policy in Asian Economies

This paper analyzes the conduct and effects of macroprudential policy in 11 Asian economies. Of these, India, the People’s Republic of China, and the Republic of Korea frequently used loan-to-value ratios and required reserve ratios even before the global financial crisis. India and the People’s Republic of China are the most frequent users of macroprudential policy tools. Since 2000, tightening actions have been more frequent than loosening in the 11 economies. Most took tightening actions more frequently after the global financial crisis than before it. In most of these economies, macroprudential policy tends to be tightened when credit expands. The main empirical results from the analysis, which uses panel vector autoregression models, are that contractionary macroprudential policy has significant negative effects on credit and output; and that these effects are qualitatively similar to those of monetary policy. This suggests that policy authorities may experience potential policy conflicts when credit conditions are excessive and the economy is in recession.

Monetary and macroprudential policy in a commodity exporting economy: A structural model analysis

We build a structural small open economy model to examine the impact of monetary and macroprudential policy actions in a commodity exporting economy. The model incorporates labor market, credit market, macroprudential policy tools such as time-varying capital and reserve requirements, and shocks of FDI, commodity demand and commodity price. The model is estimated by Bayesian techniques using quarterly data for Mongolia in 2005–2017. The main results are (i) external and government spending shocks play important role on the business cycle fluctuations, (ii) capital and reserve requirements are more effective in curbing the credit growth (or changing bank lending rate), while the policy rate has stronger impact on inflation and exchange rate compared to the macroprudential tools, and (iii) combining macroeconomic and monetary policy measures is important in reducing welfare loss. These results suggest that synergies between monetary and macroprudential policy may ensure both macroeconomic and financial stability.

International Debt Overhang and Monetary Policy: A Simulation Exercise Using Czech Republic Data

We are concerned with the dangers arising from excessive international debt overhang, primarily to financial stability in the debtor country. Assuming that debt forgiveness is not possible, a subject which we modelled earlier relating to the Greek debt crisis, (Goodhart et al. (2018)), we show how an independent monetary policy can be used to smooth consumption for both borrowers and lenders. A counter-cyclical monetary policy can contract liquidity when debt growth is high and expand liquidity when default rates are high. These results are closely related to the policy debate on monetary policy as a macroprudential policy tool.

Perspectives of Macrofinance Regulation of Banking M&A in the Context of the International Reform of Banking Regulation

Mergers and acquisitions (M&A) in the banking industry pose serious threat to the post-crisis recovery amid the increasing interconnectedness of credit institutions. Yet M&A remain one of the least manageable contributors to minimization of systemic risk, should post-M&A process run short of objectives and synergy. Financial markets externalities and adverse scenarios of macro-level dynamics put additional challenges to post-M&A integration, while shortage of macroprudential policy tools fails to empower regulators in designing a roadmap towards minimization of systemic risks built in the M&A processes. Guided by the objectives of the international banking regulation reform (Basel III) we pioneer a principally new idea extending risk-centered regulation over M&A specifics aiming at integrity of banking consolidations that is highly relevant and material for resilience of the banking sector, mitigation of financial markets volatility and ultimately for financial stability. We also propose a single conceptual platform of an M&A-related rulebook as well as an M&A risk matrix that would further shape the mechanism of systemic risk alarmism.