Why is credit-to-GDP a good measure for setting countercyclical capital buffers?

Jokivuolle, Esa; Pesola, Jarmo; Virén, Matti

doi:10.1016/j.jfs.2015.03.005

Cited by 32 publications

(18 citation statements)

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“…Thus, because the incurred loss model, with its backward-looking provisioning requirements, does not adequately recognize the weakening of lending standards and the build-up of credit risks that occur 11 Interestingly enough, as documented by Fonseca, Gonzalez and Pereira da Silva (2010), before Basel III banks tended to have capital buffers well above those required by regulators in order to protect themselves from abrupt swings in business cycles and asset valuation that would otherwise lead to either immediate penalties or balance sheet adjustments. 12 See Behn et al (2013), Alessi and Detken (2014), Bank of England (2014), Buncic and Melecky (2014), Drehman and Tsatsaronis (2014) and Jokivuolle, Pesola and Viren (2015) for a discussion.…”

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Reserve Requirements and Loan Loss Provisions as Countercyclical Macroprudential Instruments: A Perspective from Latin America

Silva¹,

Agénor²

2016

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work is licensed under a Creative Commons IGO 3.0 AttributionNonCommercial-NoDerivatives (CC-IGO BY-NC-ND 3.0 IGO) license (http://creativecommons.org/licenses/by-nc-nd/3.0/igo/ legalcode) and may be reproduced with attribution to the IDB and for any non-commercial purpose. No derivative work is allowed.Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC-IGO license.Note that link provided above includes additional terms and conditions of the license.The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank, its Board of Directors, or the countries they represent.http://www.iadb.org 2016 Abstract * This paper discusses, from an analytical and operational perspective, the use of reserve requirements and loan loss provisions as countercyclical macroprudential instruments. In recent years both of these instruments have been used extensively in Latin America and elsewhere in the world. The first part of the paper sets the stage with a discussion of the rationale, in the presence of financial frictions, for using macroprudential regulation to mitigate financial system procyclicality. The second part reviews the general arguments, as well as the recent empirical evidence for Latin America, associated with the use of reserve requirements and loan loss provisions. The third part provides a normative analysis of the ways through which countercyclical reserve requirements and cyclically adjusted (or, more commonly called, dynamic) provisioning rules should be formulated, independently and jointly, to address concerns arising from procyclicality and financial volatility. Optimal countercyclical rules are discussed from the perspective of how these rules can either minimize a composite measure of economic volatility (combining measures of both macroeconomic and financial volatility) or maximize social welfare. The last part brings together the lessons for policymakers that can be drawn from the analysis. JEL classifications: E51, E58, G28

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Reserve Requirements and Loan Loss Provisions as Countercyclical Macroprudential Instruments: A Perspective from Latin America

Silva¹,

Agénor²

2016

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“…Country‐specific variables are: (a) the margins between lending and deposit rates to NFCs; (b) the sovereign bond spreads; (c) the sector's concentration ratio (i.e. the Herfindahl ratio); (d) loans to deposits as a measure of liquidity foreseen in the newly established regulatory framework; and (e) loans to GDP reflecting lending relative to economic activity (Jokivuelle, Pesola, & Viren, ). We also incorporate euro‐area variables, which enable us to reveal the similarities or the differences of the responses across countries.…”

Section: Data and Methodological Frameworkmentioning

confidence: 99%

Bank lending margins in the euro area: Funding conditions, fragmentation and ECB's policies

Louri

Migiakis

2019

Rev Financ Econ

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In this paper we study the determinants of lending margins paid by euro‐area corporates for their bank loans. Across two separate groups of countries (distressed and non‐distressed) we examine whether lending margins have been affected by structural changes in the banking sector, the credit and liquidity position of banks and the costs of funding in the corporate and sovereign bond markets. The role of ECB policies with respect to narrowing down the fragmentation in the bank lending channel is also investigated through a structural panel VAR model for the period 2003:1 to 2014:12.

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“…Sorge and Virolainen (2006) used Real GDP growth, real interest rate and lagged 'excess' indebtedness 7 to predict corporate default rates. These three macroeconomic factors have been shown to explain fluctuations in loan loss to total loans ratios surprisingly well in an aggregate country level (Jokivuolle et al, 2015), which is why we also include them together with inflation in matrix Z to control for the macroeconomic environment generating loan repayment problems. In addition, dummy variables for cooperative and savings banks, and both country and year fixed effects are included in every model specification to account for differences across bank owner/business types and to control for possible country and time heterogeneity in reporting practises.…”

Section: Empirical Methodology and Research Hypothesesmentioning

confidence: 99%

Getting Better? The Effect of the Single Supervisory Mechanism on Banks' Loan Loss Reporting and Loan Loss Reserves

Ristolainen

2018

SSRN Journal

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Why is credit-to-GDP a good measure for setting countercyclical capital buffers?

Cited by 32 publications

References 13 publications

Reserve Requirements and Loan Loss Provisions as Countercyclical Macroprudential Instruments: A Perspective from Latin America

Reserve Requirements and Loan Loss Provisions as Countercyclical Macroprudential Instruments: A Perspective from Latin America

Bank lending margins in the euro area: Funding conditions, fragmentation and ECB's policies

Getting Better? The Effect of the Single Supervisory Mechanism on Banks' Loan Loss Reporting and Loan Loss Reserves

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