Macro-Prudential Policies to Mitigate Financial System Vulnerabilities

Macro-Prudential Policies to Mitigate Financial System Vulnerabilities

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Macro-prudential policies aimed at mitigating systemic financial risks have become part of the policy toolkit in many emerging markets and some advanced countries. Their effectiveness and efficacy are not well-known, however. Using panel data regressions, we analyze how changes in balance sheets of some 2, 800 banks in 48 countries over 2000a€“2010 respond to specific macro-prudential policies. Controlling for endogeneity, we find that measures aimed at borrowersa€“a€“caps on debt-to-income and loan-to-value ratiosa€“a€“and at financial institutionsa€“a€“limits on credit growth and foreign currency lendinga€“a€“are effective in reducing asset growth. Countercyclical buffers are little effective through the cycle, and some measures are even counterproductive during downswings, serving to aggravate declines, consistent with the ex-ante nature of macro-prudential tools.I. INTRODUCTION This paper analyzes the use of macro-prudential policies aimed at reducing vulnerabilities in banking systems. Recent events ... To help guide the use of macro-prudential policies, this paper asks the following three questions. ... Since during booms measured risks (specifically a€œvalue at riska€) tends to decline, banks are then more likely to expand lending AcInternational Monetary Fund.

Title:Macro-Prudential Policies to Mitigate Financial System Vulnerabilities
Author:Stijn Claessens, Swati R. Ghosh, Miss Roxana Mihet
Publisher:International Monetary Fund - 2014-08-19


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