Macroprudential Policy and Risk-Taking

Paper Session

Saturday, Jan. 7, 2017 8:00 AM – 10:00 AM

Sheraton Grand Chicago, Missouri
Hosted By: International Banking, Economics, and Finance Association
  • Chair: Luisa Lambertini, Swiss Federal Institute of Technology-Lausanne

Macroprudential and Monetary Policy: Loan-Level Evidence from Reserve Requirements

Cecilia Dassatti Camors
,
Central Bank of Uruguay
Jose-Luis Peydro
,
International Consortium of Real Estate Associations and Pompeu Fabra University
Francesc R. Tous
,
Bank of England and Pompeu Fabra University

Abstract

Emerging markets with capital inflows may prefer to tighten reserve requirements, especially stemming from the foreign wholesale market, rather than increasing monetary rates. In this paper we analyze the impact of reserve requirements on the supply of credit to the real sector. For identification, we exploit a tightening of reserve requirements in Uruguay and its credit register that follows all bank loans granted to non-financial firms. The tightening of requirements was stronger for banks with higher liabilities from foreign banks and in foreign currency. Following a difference-in-difference approach, we compare lending to the same firm before and after the policy change among banks differently affected by the policy. We find that the tightening of the reserve requirements for banks imply a reduction of the supply of credit to firms; more affected banks increase their exposure into riskier firms; and larger and more solvent banks mitigate the effects. Importantly, the stronger quantitative results are for the tightening to bank liabilities stemming from foreign banks. Moreover, the firm level analysis reveals that the cut in credit supply in the loan-level analysis was binding for firms. The results have implications for macroprudential, monetary and capital inflows policies.

Regulatory Arbitrage in Action: Evidence from Banking Flows and Macroprudential Policy

Dennis Reinhardt
,
Bank of England
Rhiannon Sowerbutts
,
Bank of England

Abstract

We use a new database on macroprudential policy actions to examine whether macroprudential regulations affect international banking flows. We find evidence that borrowing by the domestic non-bank sector from foreign banks increases after home authorities take a macroprudential capital action. We find no increase in borrowing from foreign banks after an action which tightens lending standards (such as limits on loan-to-value ratios for house purchase). Evidence on reserve requirements is mixed. Differences in the application of regulation for lending standards and capital regulation for international banks mean that while there is a level playing field for lending standards regulation, this does not always apply for capital regulation, giving foreign branches regulated by their home authorities a competitive advantage. Our results are, at first sight, different from the literature on regulatory arbitrage: we find that foreign banks expand their lending into host countries where regulation is tightened. But this does not occur when regulations apply also to them. The results have implications for macroprudential instrument choice and calibration, and for reciprocating regulation internationally.

Risk-Taking Dynamics and Financial Stability

Anton Korinek
,
Johns Hopkins University and NBER
Martin Nowak
,
Harvard University

Abstract

We study how compositional effects in the financial sector drive the dynamics of aggregate risk-taking and lead to novel effects of financial policy interventions. When financial market participants differ in their risk-taking, good shock realizations increase the capital of high risk-takers more than that of low risk-takers. This raises the fraction of wealth controlled by high risk-takers and, under incomplete markets, increases aggregate risk-taking. The opposite conclusions apply for bad shocks. As a result, aggregate risk-taking is pro-cyclical, capturing Minsky's financial instability hypothesis that "booms sow the seeds of the next crisis." Public policy interventions work primarily by affecting the composition of the financial sector, in contrast to the static restriction on choice sets that is the focus of most conventional economic frameworks. For example, bailouts have deleterious effects not because they affect incentives but because they interfere with the natural capitalist selection process. Interventions to stabilize aggregate risk-taking bring the economy closer to the first-best, increasing expected growth and reducing aggregate volatility.

Informational Synergies in Consumer Credit

Martin Thomas Hibbeln
,
University of Duisburg-Essen
Lars Norden
,
Fundacao Getulio Vargas
Piet Usselmann
,
Braunschweig University of Technology
Marc Guertler
,
Braunschweig University of Technology

Abstract

The production of private information about borrower risk is a core function of financial intermediation. However, little is known about synergies between different sources of private information. We focus on consumer credit and investigate the existence and magnitude of cross-product informational synergies, using 1.7 million monthly observations from checking accounts and credit card accounts of the same individuals during 2007-2014. We find that activity measures from both accounts contain significant information about default risk beyond credit scores, borrower characteristics, and bank-borrower relationship characteristics. We also find that checking accounts display warning indications earlier and more accurately than credit card accounts. Type I default prediction errors decrease by 33% when checking account information is added to credit card information, but only by 2% when credit card information is added to checking account information. The evidence suggests important informational synergies that are relevant for the supply and the allocation of consumer credit.
Discussant(s)
Nada Mora
,
Federal Reserve Bank of Richmond
Joel Houston
,
University of Florida
Borghan N. Narajabad
,
Federal Reserve Board
Bob Chakravorti
,
Chakra Advisors
JEL Classifications
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
  • G2 - Financial Institutions and Services