The impact of macroprudential policy on financial stability in selected EU countries*

Mean

-1.97

0.04

0.59

0.08

1.16

-0.12

-0.02

0.17

-0.17

Median

-1.22

-0.10

0.24

0.12

0.90

-0.07

-0.02

-0.11

-0.15

Maximum

80.41

7.10

18.11

2.03

13.99

1.07

1.32

17.96

3.44

Minimum

-34.33

-4.90

-4.79

-2.16

-6.65

-3.79

-1.38

-10.47

-2.69

Standard deviation

10.80

2.23

2.37

0.54

3.46

0.61

0.44

2.79

0.77

Skewness

4.16

0.45

4.88

-0.10

0.99

-2.15

0.36

2.88

0.77

Kurtosis

37.63

3.72

35.66

6.91

5.66

14.82

4.98

23.08

8.74

Jarque-Bera

5,074.44

5.38

4,648.03

61.22

43.92

632.61

17.68

1,746.59

141.32

Probability

0.00

0.07

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Sum

-189.22

3.60

56.73

8.08

111.21

-11.90

-2.19

16.69

-16.60

Sum sq. dev.

11,089.82

470.89

531.76

28.07

1,136.47

35.75

18.11

737.41

56.32

Obser.

96

96

96

96

96

96

96

96

96

Davis, Liadze and Piggott (2019)

UK, Italy and Germany

National Institute's Global Econometric Model, NiGEM. NiGEM is a global econometric model, and most countries in the EU and the OECD, as well as major emerging markets, are modelled individually. The rest of the world is modelled through a set of regional blocks so that the model is global in scope. Macroprudential policy is incorporated in NiGEM. There are three simulations/shocks in the models: Tightening of loan-to-value policy; increase in risk-adjusted capital adequacy target; and historic dynamic simulation for the crisis period.

The loan-to-value simulation predominantly impacts consumption and the housing market, whereas the capital adequacy simulation has a more significant effect on investment and output. Both simulations increase bank capital ratios and curb bank lending. The findings of the study suggest that, overall, the loan-to-value tool has a lower effect than capital adequacy on the probability of a banking crisis occurring and leads to lower net benefits. The introduction of macroprudential policy measures before the onset of the crisis leads to an improvement in key macroeconomic measures and might therefore prevent the crisis from materializing.

Carreras, Davis and Piggott (2018)

19 OECD countries

Cointegration framework; Vector-Error-Correction (VECM), Vector Autoregression (VAR), Fully- Modified OLS (FMOLS) and Seemingly-Unrelated (SUR) estimation.

A comparison of results from cointegration with non-cointegrating specifications.

Macroprudential policy instruments (taxes on financial institutions, capital requirements, loan to value ratios, debt to income ratio limits, limits on foreign currency lending, limits on interbank exposures and concentration limits) have a positive impact on stalling household credit growth and house prices in both short-run and long-run. Tools such as limits on debt-to-income ratios are more effective for limiting house price growth, whilst tools such as limits on interbank exposures are more effective for constraining household credit growth.

Olszak, Roszkowska and Kowalska (2019)

65 countries

GMM 2-step Blundell and Bond approach and random effects method

Macroprudential policy instruments indeed curb the procyclical impact of capital ratios on loan growth rate, whereby this impact is more pronounced in large banks than in smaller banks. Of the investigated macroprudential instruments, only borrower-based measures such as LTV and DTI caps seem to act countercyclically by weakening the positive impact of capital ratio on bank lending, in particular in crisis periods.

Ma (2020)

A small open economy

A small open economy (SOE) model with endogenous growth and occasionally binding collateral constraints to analyse the role of macroprudential policy in the context of a trade-off between growth and financial stability.

Macroprudential policy is shown to substantially strengthen financial stability (it reduces the frequency and probability of crises) at the cost of a very small negative effect on average growth and welfare. In two extensions of the model (one with a growth subsidy and another one with a direct growth externality), the optimal macroprudential policy proves to have a more pronounced effect on welfare and growth. Although macroprudential policy slightly curbs average growth, it is still desirable to use it, since it enhances financial stability and smooths consumption.

Akinci and Olmstead-Rumsey (2018)

57 advanced and emerging economies

Estimation of a dynamic panel data regression model with country fixed effects using the Generalized Method of Moments (GMM).

Macroprudential tightening (by using macroprudential tools such as LTV limits, DSTI limits, other housing measures, time-varying capital requirements, provision requirements, consumer loan limits, and credit growth ceilings) dampens bank credit growth, housing credit growth, and house price appreciation. Macroprudential policies targeting the housing sector appear to be more effective at constraining housing credit growth and house price appreciation, in particular in economies where bank finance is of greater importance. Counterfactual simulations indicate that, if the countries had not used any macroprudential policy measures in the period 2011–2013, the bank credit growth, housing credit growth and house price appreciation would have been substantially higher.

Meuleman and Vander Vennet (2020)

Listed European banks

Dynamic panel framework

Borrower-oriented tools and exposure limits are found to reduce the individual bank risk component. Liquidity measures are found to reduce the systemic linkage of banks in addition to reducing individual bank risk. Credit growth measures and exposure limits seem to lead to an increase in systemic risk component for some banks – possibly because some banks, when trying to observe the rules, take up riskier activities or similar exposures, thus exacerbating interconnectedness of the banks in the system. Macroprudential policies seem to be the most effective for distressed banks, that is banks with a high ratio of nonperforming loans. The results of the study give some indications for the optimal design of macroprudential measures.

Altunbas, Binici and Gambacorta (2017)

61 advanced and emerging market economies

Baseline empirical regression model adapted from Altunbas, Gambacorta and Marques-Ibanez (2014); S-GMM estimator

The results of the study are three-fold: Macroprudential policy tools have a substantial effect on bank risk. Banks with different characteristics do not respond uniformly to changes in macroprudential policy tools. Small, weakly capitalized banks, and banks having a high share of wholesale funding respond more strongly to changes in macroprudential policy tools. Macroprudential policies are more efficient when employed during a downturn than during a boom.

Cizel et al. (2019)

40 economies

Panel regression; PSM approach to simulate the effect of a randomized experiment in nonrandom, observed data

The authors investigate whether the implementation of macroprudential policy leads to a substitution of bank credit with non-bank credit. On the one hand, it could be claimed that the substitution effect leads to the propagation of new systemic risks, since when credit shifts away from banks, households and firms continue to accumulate debt, thus engendering macroeconomic fragility. On the other hand, it could be asserted that the substitution effect reduces systemic risks, since non-bank financial institutions are, by and large, less leveraged and with lower liquidity risks than the banks, and mostly do not have access to public safety nets, hence are less prone to the moral hazard problem.

Dumičić (2018)

11 CEE countries

Panel regressions using the OLS method and cross-section SUR panel-corrected standard errors

The findings demonstrate that in the CEE countries, macroprudential policies were more effective in weakening the flow of credit to households than the flow of credit to the non-financial corporate sector prior to the global financial crisis with the onset in 2007. This is predominantly because the non-financial corporate sector also had access not only to domestic bank credit, but also to non-bank and cross-border credit. The conclusion of the paper is that some international cooperation among policymakers is warranted so as to align macroprudential policies and prevent “regulatory arbitrage”.