Finance: Research, Policy and Anecdotes

Effectiveness of macro-pru in the Americas

I had the honour of co-editing a special issue of the Journal of Financial Intermediation, just published, comprising five papers that use granular data to assess the effectiveness of different macro-prudential tools. While macro-prudential regulation has become very prominent over the past decade, following the experience of the Global Financial Crisis, there is still limited empirical evidence on what works and what does not. Assessing the effect of macroprudential policies is made difficult by two challenges: endogeneity of policy decisions and difficulty of differentiating between demand and supply-side reactions. Using bank- or loan-level data allows to address these challenges to a certain extent and that is what these five papers are doing. Doing so, however, limits the analysis typically to one country at a time and thus limits the external validity of each study. In the first paper, however, my special issue co-editor Leonardo Gambacorta and Andres Murcia undertake a meta-analysis of studies by five central banks in Latin America countries (Argentina, Brazil, Colombia, Mexico and Peru) to evaluate the effectiveness of macroprudential tools and their interaction with monetary policy; they find that macroprudential policies in these five countries have been quite successful in stabilising credit cycles and macroprudential tools have a greater effect on credit growth when reinforced by the use of monetary policy. Thus interaction of macro-pru and monetary policies is a first important key insight.

 

A paper on the impact of macroprudential housing tools in Canada combines loan-level administrative data with household-level survey data on first-time homebuyers and finds that policies targeting the loan to value (LTV) ratio have a larger impact than policies targeting the debt service-to-income (DSTI) ratio, such as amortisation. A paper focusing on the US finds that the initiation of the Comprehensive Capital Analysis and Review (CCAR) stress tests in 2011 had a negative effect on the share of jumbo mortgage originations and approval rates at stress-tested banks – banks with worse capital positions were impacted more negatively. Macro-pru can thus be effective in reducing the cyclicality of housing (credit) cycles. And as a study on Brazil shows, it can also reduce defaults. Specifically, the authors study the impact of the introduction of LTV limits in Brazil against the back drop of a housing price boom in 2013. Borrowers that were constrained by the LTV limit have a significantly lower chance of being in arrears, which ultimately limits the build-up of risk, showing the effectiveness of LTV caps.

 

Finally, a study on Colombia evaluates the effects of the introduction of:(i) a dynamic provisioning scheme for commercial loans; and ii) a countercyclical reserve requirement implemented in 2007 to control for excessive credit growth. Results suggest that both policies and an aggregate measure of the macroprudential policy stance had a negative effect on credit growth, with the effect varying with bank and debtor-specific characteristics. The effects are intensified for riskier debtors, thus suggesting that the aggregate policy stance in Colombia has worked effectively to stabilise credit cycles and reduce risk-taking.

 

The number of papers using loan-level data has exponentially increased over the past years and so has the number of papers assessing macro-prudential policies.  There will be lots more to be learned, both on the country-level but also comparing across countries.