Global banking and the conduct of macroprudential policy in a monetary union

Abstract

This paper questions the role of cross-border lending in the definition of national macroprudential policies in the European Monetary Union. We build and estimate a two-country DSGE model with corporate and interbank cross-border loans, Core-Periphery diverging financial cycles and a national implementation of coordinated macroprudential measures based on Countercyclical Capital Buffers. We get three main results. First, targeting a national credit-to-GDP ratio should be favored to federal averages as this rule induces better stabilizing performances in front of important divergences in credit cycles between core and peripheral countries. Second, policies reacting to the evolution of national credit supply should be favored as the transmission channel of macroprudential policy directly impacts the marginal cost of loan production and, by so, financial intermediaries. Third, the interest of lifting up macroprudential policymaking to the supra-national level remains questionable for admissible value of international lending between Eurozone countries. Indeed, national capital buffers reacting to the union-wide loan-to-GDP ratio only lead to the same stabilization results than the one obtained under the national reaction if cross-border lending reaches 45%. However, even if cross-border linkages are high enough to justify the implementation of a federal adjusted solution, the reaction to national lending conditions remains remarkably optimal.JEL classification: F42; F45; E58; F34.

Are there financial stability gains from international macroprudential policy coordination?

“…Most of the literature has examined macroprudential policy coordination in the European Monetary Union (EMU), but there is no consensus on the size of coordination gains. For example, Poutineau and Vermandel (2017) built a two‐country DSGE model that included cross‐border loans and the deviation of core‐peripheral financial cycle, and found that there are still doubts about raising macroprudential policy formulation to the supranational level, and supported the establishment of macroprudential policies at the national level. However, the DSGE model of the monetary union between the two countries was constructed by Agénor, Jackson, Kharroubi, et al (2021) to compare the different welfare of non‐cooperative Nash equilibrium and cooperative equilibrium in macroprudential policy.…”

Heterogeneous Monetary Zone and Macroprudential Policy: The Case of the Waemu Zone

“…The first approach raises the question of the relevance of a common policy to correct specific financial imbalances (Dehmej and Gambacorta, 2018). Indeed, given the existence of structural heterogeneities, the conduct of a single macroprudential policy would be likely to accentuate divergences and financial imbalances within a monetary zone (Poutineau and Vermandel, 2018).…”

“…The macroprudential instrument in the form of the loan-to-value ratio (LTV) associated with the single monetary policy allows for the reduction of financial imbalances within the national economy. Poutineau and Vermandel (2018), using a neo-Keynesian model, analyze the relevance of the implementation of macroprudential policy within a heterogeneous monetary union. Due to the structural heterogeneities that feed the heterogeneity of financial cycles within the euro area, the conduct of national macroprudential policy is effective in preserving financial stability in contrast to joint action.…”

Can macroprudential tools ensure financial stability?

“…That is a reason not to coordinate within the euro area. However, in the case of a common situation within the euro area, research shows that there would be benefits from coordinated actions (Rubio and Carraso-Gallego (2016)) while other conclude there is no need for it (Poutineau and Vermandel (2017)).…”