Assessing macro-prudential policies: the case of FX lending
- PDF / 842,715 Bytes
- 44 Pages / 439.642 x 666.49 pts Page_size
- 3 Downloads / 193 Views
Assessing macro-prudential policies: the case of FX lending Michael Sigmund1
© Academy of Economics and Finance 2020
Abstract This paper analyzes effectiveness and side effects of pre Basel III macroprudential policy measures to reduce excessive foreign currency (FX) lending growth in Austria to the private non-financial sector. Our series of macroprudential measures were introduced in 2003, 2008, 2010 and 2013. For assessing their effectiveness, we set up a Cournot oligopoly model with two types of loans and intra-firm competition, and apply a simultaneous equation panel model to estimate the model parameters for a quarterly data set of around 750 Austrian banks from 1998 to 2016. Our results indicate that the legally binding measures starting in 2010 were more effective than previous legally non binding measures in curbing FX lending, while banks simultaneously substituting these loans with euro loans. We show that these macroprudential measures are also effective with regard to reducing the identified risks and efficiently avoid unintended negative side effects such as credit crunches. Keywords Macroprudential policy · Simultaneous equation model · Systemic risks · Foreign currency lending JEL Classification E44 · E50 · E58 · E60 · G20
1 Introduction In recent years, many advanced and emerging countries have introduced macroprudential policies to limit the risks and costs of systemic crises.1 Since the financial 1 The
term “macroprudential” was introduced in the 1970s (Clement 2010). Especially, authorities from the Bank for International Settlements (BIS) have promoted the macroprudential approach to banking supervision. Michael Sigmund
[email protected] 1
Economic Analysis Division, Oesterreichische Nationalbank (OeNB), Otto-Wagner-Platz 3, A-1090 Vienna, Austria
Journal of Economics and Finance
crisis in 2008, policymakers and market participants widely agree that idiosyncratic events may potentially trigger severe instability or collapse an entire industry or economy, also known as “systemic risk” (Iori et al. 2006). The materialization of systemic risk may lead to systemic crises endogenously, when markets, policy makers and/or individuals do not correctly anticipate the system risk or its costs. Hence, systemic risk poses a significant risk to financial stability. Well known policies such as microprudential, monetary and fiscal policy tools, even when conducted properly, do not always suffice to prevent financial instability or limit the costs of a crisis. Restoring financial stability after a financial crisis is undoubtedly very costly. For example, Eurostat (2015, 2018) report that the total costs of 241.3 bn euro for the general governments in the EU-28 to support financial institutions from 2007 to 2017. Following Galati and Moessner (2013), the overall key objectives of macroprudential measures (henceforth, MMs) are (1) limiting financial system-wide distress and (2) avoiding macroeconomic costs linked to financial stability. The 2008 financial crisis has uncovered the need to establis
Data Loading...
