What Can (Macro-) Prudential Policy do to Support Monetary Policy?

Borio, Claudio; Shim, Ilhyock

doi:10.2139/ssrn.1120287

Cited by 153 publications

(145 citation statements)

References 35 publications

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“…19 There is an ongoing discussion in the literature regarding the positive and the negative aspects of rules and discretion. The best policy to avoid excessive procyclicality in the banking sector appears to involve a trade-off between rules and discretion (Borio and Shin, 2007). In the following discussion, we present the main proposals concerning rules and discretion.…”

Section: Proposals Concerning the Basel II Frameworkmentioning

confidence: 99%

Bank procyclicality and output: Issues and policies

Athanasoglou¹,

Daniilidis

Delis

2014

Journal of Economics and Business

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The recent global financial crisis has highlighted the importance of the procyclicality of the financial sector. The procyclicality has transformed banks from mitigation mechanisms to amplifiers of changes in economic activity, potentially affecting financial stability and economic growth. The causes of procyclicality can be attributed to market imperfections and deviations from the efficient market hypothesis, while other factors including the Basel-type regulations, accounting standards and leverage have exacerbated it. Several suggestions have been forwarded to attenuate procyclicality, in the form of rules and discretion. They are presented here according to the factors they aim to alleviate. Some of the suggestions have been adopted under the Basel III framework, which explicitly addresses the procyclicality issue.

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Section: Proposals Concerning the Basel II Frameworkmentioning

confidence: 99%

Bank procyclicality and output: Issues and policies

Athanasoglou¹,

Daniilidis

Delis

2014

Journal of Economics and Business

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“…In the known cases (e.g. in China, Korea, and Romania), the regulatory authorities deemed this step a success, although usually this was introduced as part of a bigger package, thus its individual effect is hard to assess (Borio et al 2007). In the Hungarian literature, we can also find papers which dealt with the regulation of PTI.…”

Section: Relationship Between the Payment-to-income Ratio And Credit mentioning

confidence: 99%

Modelling probability of default and optimal PTI level by using a household survey

Balás

Banai

Hosszú³

2015

Acta Oeconomica

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The risks of household lending are still a major issue in Hungarian banking. The proportion of nonperforming loans is rising continuously. We constructed a model to fi nd those factors which have signifi cant effect on the probability of default of households' mortgages. We also used this model to calibrate the optimal level of household mortgages' payment-to-income ratios, which is important from a regulatory point of view. Our results show that the denomination of the loan and the indebtedness of the household are crucial factors in the performance of the loan. We also show that loans contracted via agents are riskier than others. The results carry two important messages from a regulatory perspective. Prescribing the same payment-to-income (PTI) ratios for HUF and FX loans may be unnecessarily restrictive for the former and excessively permissive for the latter. The uniform regulation of households with different income levels may also lead to undesired anomalies. JEL classifi cation indices: E58, G01, G21Keywords: FX lending, probability of default, payment-to-income ratio, bank regulation *We are grateful to the two anonymous reviewers for their valuable comments and suggestions.

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“…Pro-cyclicality has potentially been also magnified through cyclicality of minimum capital requirements that was linked to higher risk sensitivity of Basel II capital requirements (Lowe, 2002;Borio and Shim, 2007). As banks and supervisors failed to fully appreciate risks related to emerging exposures, capital requirements were kept too low, while evidence suggests that bank lending might become particularly cyclical when banks are both under-capitalised and illiquid (ECB, 2009c).…”

Section: Increasing Cyclical Resiliencementioning

confidence: 99%

Minimising Risks from Imbalances in European Banking

Barnes

Lane

Radziwiłł

2010

OECD Economics Department Working Papers

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The euro area financial system took excessive risks during the global credit boom, which in some countries led to an unsustainable increase in credit, higher asset prices and housing booms. This process helped to fuel large imbalances within the euro area. Banks played a key role in channelling funds from economies with large surpluses to deficit countries, leading in some cases to the accumulation of considerable risks for borrowers and lenders. Weaknesses in the regulatory and supervisory architecture contributed to these problems in the euro area, as in other OECD economies. Gaps in microprudential regulation created an environment prone to excessive risk-taking: capital buffers were too small; the quality of capital was inadequate; banks’ models underestimated risks; and risks were shifted off-balance sheet and beyond supervisory oversight. Liquidity risks were not adequately monitored. Systemic risks were allowed to build up as the authorities largely failed to counter the credit cycle. Some large systemic banks contributed to growing imbalances and vulnerability. The decentralised European supervisory architecture was not sufficiently effective in supervising large cross-border institutions. When the financial crisis hit, the co-ordination of cross-border rescues proved problematic and complicated efficient resolution. Stronger regulations are needed to improve financial stability. Effective microprudential regulation is the first line of defence. This should be upgraded by implementing the Basel III capital accord, as has been announced by the EU authorities, and a range of related measures. Some consideration should be given to an accelerated phasing-in. Macroprudential regulation should be significantly developed to mitigate pro-cyclicality and reduce systemic risks posed by large cross-border banks. The creation of the European Systemic Risk Board is welcome. To improve cross-border supervision, the European Banking Authority should have sufficient powers and resources to ensure that a system based on national supervision leads to coherent regulation and effective supervision. In addition, a cross-border crisis-management framework for Europe is needed. Overall, significant steps have already been taken by the EU authorities to address these issues and further reforms are under way. This working paper relates to the 2010 OECD Economic Survey of the Euro area. (www.oecd.org/eco/surveys/EuroArea). Minimiser les risques de déséquilibre au sein du système bancaire européen Durant la phase d’explosion du crédit à l'échelle mondiale, le système financier de la zone euro a pris des risques excessifs qui ont abouti, dans quelques pays, à une augmentation insoutenable du crédit et à une flambée des prix des actifs et de l'immobilier. Ce processus a contribué au creusement d'importants déséquilibres au sein de la zone euro. Les banques ont joué un rôle majeur dans la transmission des ressources financières des économies affichant des excédents importants vers les pays déficitaires, ce qui a conduit, dans certains...

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What Can (Macro-) Prudential Policy do to Support Monetary Policy?

Cited by 153 publications

References 35 publications

Bank procyclicality and output: Issues and policies

Bank procyclicality and output: Issues and policies

Modelling probability of default and optimal PTI level by using a household survey

Minimising Risks from Imbalances in European Banking

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