Macroprudential Policies and Credit Creation

Abstract Following the crisis, macroprudential regulations targeting mortgage-market vulnerabilities were widely adopted, their success often relying on the response of financial intermediaries. We provide evidence from Canada suggesting banks may have behaved strategically to limit the effectiveness of recently implemented mortgage stress tests. Before implementation, borrowers had to prove they could make mortgage payments based on the interest rate specified in the contract. The new tests require borrowers to show they can afford payments based on a typically higher qualifying rate, derived from the mode of 5-year rates posted by the six largest banks. The government’s objective was to cool credit markets, but, since many mortgages are government-insured, the big banks’ interests were not aligned. We find evidence of rate manipulation using a difference-in-differences approach comparing changes in spreads for 5-year mortgages with 3-year spreads, unaffected by the policy. The qualifying rates were lowered encouraging continued borrowing, muting the tests’ impact.

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Macroprudential Policy - Taxonomy and Challenges

National Institute Economic Review ◽

10.1177/0027950111411375 ◽

2011 ◽

Vol 216 ◽

pp. R1-R15 ◽

Cited By ~ 7

Author(s):

Erland W. Nier

Keyword(s):

Financial Crisis ◽

Financial Regulation ◽

Global Financial Crisis ◽

Policy Framework ◽

Macroprudential Policy ◽

Macroprudential Policies ◽

The Global Financial Crisis ◽

Governance Arrangements ◽

Country Specific

There is increasing recognition that prior to the global financial crisis financial regulation had lacked a macroprudential perspective. There has since been a strong effort to make a new macroprudential orientation operational, including through the establishment of new macroprudential authorities or ‘committees’ in a number of jurisdictions. These developments raise — and this paper explores — the following three questions. First, what distinguishes macroprudential policy from microprudential policy and what are its key tasks? Second, what powers should be given to macroprudential authorities and what should be their mandate? Third, how can governance arrangements ensure that macroprudential policies are pursued effectively? While arrangements for macroprudential policy will to some extent be country-specific, we identify three basic challenges in setting up an effective macroprudential policy framework and discuss options to address them.

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Benchmarking macroprudential policies: An initial assessment

Journal of Financial Stability ◽

10.1016/j.jfs.2016.08.007 ◽

2016 ◽

Vol 27 ◽

pp. 35-49 ◽

Cited By ~ 11

Author(s):

Domenico Lombardi ◽

Pierre L. Siklos

Keyword(s):

Initial Assessment ◽

Macroprudential Policies

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Financial openness, bank capital flows, and the effectiveness of macroprudential policies

Macroeconomic Dynamics ◽

10.1017/s1365100521000353 ◽

2021 ◽

pp. 1-32

Author(s):

Hao Jin ◽

Chen Xiong

Keyword(s):

Open Economy ◽

Capital Flows ◽

Open Economies ◽

Small Open Economy ◽

Empirical Support ◽

Bank Capital ◽

Macroprudential Policy ◽

Funding Sources ◽

Macroprudential Policies ◽

Dynamic Stochastic

Abstract This paper quantitatively examines the macroeconomic and welfare effects of macroprudential policies in open economies. We develop a small open economy dynamic stochastic general equilibrium (DSGE) model, where banks choose their funding sources (domestic vs. foreign deposits) and are subject to financial constraints. Our model predicts that banks reduce leverage in response to a macroprudential policy tightening, but increasingly rely on foreign funding. This endogenous shifts of funding composition significantly undermine the stabilizing effect and welfare gains of macroprudential policies. Our results also suggest macroprudential policies are less effective in financially more open economies, and optimal policy should take capital flows into consideration. Finally, we find empirical support for the model predictions in a group of developing and emerging economies.

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House Prices and Macroprudential Policies: Evidence from City-Level Data in India

SSRN Electronic Journal ◽

10.2139/ssrn.3772497 ◽

2020 ◽

Author(s):

Bhupal Singh

Keyword(s):

House Prices ◽

Macroprudential Policies ◽

Level Data

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THE INTERNATIONAL IMPACT OF MACROPRUDENTIAL POLICIES

10.32920/ryerson.14664312 ◽

2021 ◽

Author(s):

Doriane Intungane

Keyword(s):

Equilibrium Model ◽

Capital Requirements ◽

Dynamic Stochastic General Equilibrium ◽

Time Varying ◽

Credit Growth ◽

Cross Border ◽

Macroprudential Policies ◽

Dynamic Stochastic ◽

The Impact

The recent financial crisis started a global debate on the role of financial policies, which led to financial system reforms in many countries. These reforms mainly consisted of increasing the usage of macroprudential policies. This dissertation seeks to understand whether macroprudential policies in financially integrated countries reduced their vulnerability to the impact of external shocks. Chapter 2 empirically examines the impact of macroprudential policies on cross-border bilateral credit growth. Capital requirements and loan-to-value (LTV) ratios, in 15 lending countries and 34 borrowing countries between 2000 and 2014, are used in the analysis. The results show that in some countries, the increase of capital requirements is not effective in reducing international credit flows during periods of financial vulnerability. The impact of tightening LTV ratios is more heterogeneous across countries because LTV ratios are mainly used in the housing sector and not all countries change their LTV ratio frequently. Hence, cooperation across countries is necessary but also countries should make sure that the change of macroprudential policies targeting lenders and those targeting borrowers complement each other to avoid international leakages. Chapter 3 analyzes issues related to the international spillover of macroprudential policies through international banking activities using a two-country dynamic stochastic general equilibrium model with heterogeneous and time-varying macroprudential policies. The results show that a combination of capital requirements and LTV ratios is effective in reducing credit growth despite the existence of cross-border banking activities and heterogeneous implementation of capital requirements across countries. In addition, international coordination of capital requirements is also effective in reducing credit growth but less effective than a combination of capital requirements and LTV ratios. Chapter 4 focuses on the role of countercyclical LTV ratios in reducing transmission of shocks when international investors, holding domestic and foreign assets, face collateral constraint. Using a two-country dynamic stochastic general equilibrium model, the analysis demonstrates that time-varying LTV ratios can reduce the transmission of shocks.

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