Policies for Macrofinancial Stability: How to Deal with Credit Booms

Bakker, Bas; Dell’Ariccia, Giovanni; Laeven, Luc; Vandenbussche, Jérôme; Igan, Deniz; Tong, Hui

doi:10.5089/9781475504743.006

Cited by 92 publications

(18 citation statements)

References 50 publications

(41 reference statements)

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“…These papers commonly perform event studies or panel data regressions at the country level. The overall ndings of this literature can be summarized as follows: i) macroprudential policies can reduce the impact of a bust, diminishing the impact on the real economy (Bakker et al (2012)); ii) their tightening is associated with lower bank credit growth and house price ination (Bruno et al (2015), Cerutti et al (2015) and Akinci & Olmstead-Rumsey (2015)); iii) the eects appear to be smaller in more nancially developed and open economies (Cerutti et al (2015)) and; iv) macroprudential policies are more successful when they complement monetary policy by reinforcing monetary tightening, than when they act in opposite directions (Bruno et al (2015)).…”

Section: Related Literaturementioning

confidence: 99%

Evaluating the impact of macroprudential policies in Colombia's credit growth

Gómez-González¹,

Lizarazo-Cuellar²,

Mendoza-Gutiérrez³

et al. 2017

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Macroprudential tools have been used around the world as a mechanism to control potential risks and imbalances in the nancial sector. Colombia is a good example of a country that has employed dierent regulatory measures to manage systemic risks in the economy. The purpose of this paper is to evaluate the eectiveness of two policies employed in said country to increase the resilience of the system and to moderate exuberance in credit supply. The rst measure, the countercyclical reserve requirement, was implemented in 2007 to control excessive credit growth. The second tool corresponds to the dynamic provisioning scheme for commercial loans, whose objective was to consolidate a countercyclical buer through loan loss provision requirements. To perform this analysis a rich data set based on loan-by-loan information for Colombian banks during the period between 2006 and 2009 is used. A xed eects panel model is estimated using debtors', banks' and macroeconomic characteristics as control variables. In addition, a dierence in dierences estimation is performed to evaluate the impact of the aforementioned policies. Findings suggest that dynamic provisions and the countercyclical reserve requirement had a negative eect on credit growth, and that said eect diers conditioned on bank-specic characteristics. Results also suggest that the aggregate macroprudential policy stance in Colombia has worked as an eective stabilizer of credit cycles, with some preliminary evidence also pointing towards signicant eects in reducing bank risktaking. Moreover, evidence is found that macroprudential policies have worked as a complement of monetary policy, accompanying the stabilizing eects of changes in interest rates on credit growth. JEL classication: E58, G28, C23 from the Bank of Mexico for their valuable comments on a preliminary version of this paper. We would also like to thank the participants of the LACEA meeting in Santa Cruz and Banco de la Republica's research seminar for their comments.The opinions contained herein are the sole responsibility of the authors and do not reect those of Banco de la República or its Board of Governors. All errors and omissions remain our own.Director,

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Section: Related Literaturementioning

confidence: 99%

Evaluating the impact of macroprudential policies in Colombia's credit growth

Gómez-González¹,

Lizarazo-Cuellar²,

Mendoza-Gutiérrez³

et al. 2017

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“…This precautionary regulation aims to curtail credit booms that might end in financial crises. However, not all credit booms lead to crises (see, Bakker et al, 2012). The probability of default can be a good candidate for correcting this potential error: non-beneficial reductions in bank loans.…”

Section: Introductionmentioning

confidence: 99%

Welfare analysis of bank capital requirements with endogenous default

Garcia-Barragan

Liu

2018

Economic Modelling

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This paper presents a tractable framework with endogenous default and evaluates the welfare implication of bank capital requirements. We analyze the response of social welfare to a negative technology shock under different capital requirement regimes with and without default. We show that including default as an additional indicator of capital requirements is welfare improving. When implementing capital requirements, a more aggressive reaction to the default rate is more effective for weakening the negative effect of the shock on welfare. Compared with output gap, the credit-to-output gap is a better indicator for implementing the countercyclical capital buffer.JEL Classification: E44, E47, E58, G28

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“…A number of studies employ statistical techniques, for example, Terrones (2008, 2012), Gourinchas, Valdes and Landarretch (2001), Barajas, Dell'Ariccia andLevchenko (2009), Tornell andWestermann (2002), IMF (2011), Dell'Ariccia et al (2012, and Arena et al (2015). They compare a country's credit-to-GDP ratio or real credit per capita to its nonlinear trend and determine the episodes of credit booms when the positive deviations from trend pass a certain threshold.…”

Section: Identification Of Credit Boom Episodesmentioning

confidence: 99%

“…Dell'Ariccia et al (2012) employ simple pooled OLS regression to study some policy variables that may trigger credit booms and conclude that credit booms seem to occur more often in countries with fixed exchange rate regimes and expansionary macroeconomic policies. However, their regression results are based on a pool of both industrial and emerging economies sampled together and with relatively few observations in the sample.…”

Section: Introductionmentioning

confidence: 99%

Credit Booms in Developing Countries: Are They Different from Those in Advanced and Emerging Market Countries?

Meng

González

2016

Open Econ Rev

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While earlier studies focus on credit booms in advanced and emerging market countries, this paper examines the characteristics and determinants of credit booms in developing countries. The results find that credit booms in developing countries are less likely to be associated with systemic banking crises. Rather, they are more likely to be the result of financial deepening than of dangerous buildups of financial risks; the prevention of credit booms in developing countries may thus be associated with higher opportunity costs in terms of foregone growth opportunities. Random effect probit and tobit regressions find some evidence that size of financial system and favorable macroeconomic conditions are among the determinants of credit booms. Although monetary and fiscal policies do not help in preventing credit booms in developing countries, we find that prudential regulations and supervision can play a much more effective role in preventing "bad" booms, while incurring substantially lower costs. Although "bad" booms are hard to identify ahead of time, the duration and size of booms, as well as the level of credit aggregates, appear to be useful indicators in determining them.

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Policies for Macrofinancial Stability: How to Deal with Credit Booms

Cited by 92 publications

References 50 publications

Evaluating the impact of macroprudential policies in Colombia's credit growth

Evaluating the impact of macroprudential policies in Colombia's credit growth

Welfare analysis of bank capital requirements with endogenous default

Credit Booms in Developing Countries: Are They Different from Those in Advanced and Emerging Market Countries?

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