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Journal of Economics and Finance

Erschienen in:

09.09.2020

Assessing macro-prudential policies: the case of FX lending

Erschienen in: Journal of Economics and Finance | Ausgabe 2/2021

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Abstract

This paper analyzes effectiveness and side effects of pre Basel III macroprudential policy measures to reduce excessive foreign currency (FX) lending growth in Austria to the private non-financial sector. Our series of macroprudential measures were introduced in 2003, 2008, 2010 and 2013. For assessing their effectiveness, we set up a Cournot oligopoly model with two types of loans and intra-firm competition, and apply a simultaneous equation panel model to estimate the model parameters for a quarterly data set of around 750 Austrian banks from 1998 to 2016. Our results indicate that the legally binding measures starting in 2010 were more effective than previous legally non binding measures in curbing FX lending, while banks simultaneously substituting these loans with euro loans. We show that these macroprudential measures are also effective with regard to reducing the identified risks and efficiently avoid unintended negative side effects such as credit crunches.

Vorheriger Artikel African equity markets’ exposure to oil and other commodities - implications for global portfolio diversification

Nächster Artikel Empirical analysis of term structure shifts

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The term “macroprudential” was introduced in the 1970s (Clement 2010). Especially, authorities from the Bank for International Settlements (BIS) have promoted the macroprudential approach to banking supervision.

In the euro are, the new Capital Requirements Directives IV package (commonly known as Basel III) came into force on the 17^th of July 2013 and includes the EU Directive 2013/36/EU and the EU Regulation 575/2013.

We only review bank-by-bank level studies, as we consider the identification of the effectiveness of macroprudential policies as particular challenging.

Referring to the Article 39 Austrian Banking Act.

For the sake of completeness, it should be mentioned that on 1 June 2017 the FMA published revised Minimum Standards. It includes an extension regarding information obligations towards borrowers, standards for improving market transparency and possible risk provisions to be taken by banks (FMA 2017).

The constraints from Eq. 7d for the demand functions are binding but not implausible.

Brzoza-Brzezina et al. (2010) also investigate the substitution of foreign and domestic currency loans in Central Europe.

We lag the interest rates to avoid endogeneity problems. Lim et al. (2011), Nier et al. (2012), and Cerutti et al. (2017) follow the same approach to address potential endogeneity biases.

Claessens et al. (2013) also control for bank-specific conditions as banks’ ability to adjust their asset size changes with factors such as initial leverage and funding structures.

Ozge and Olmstead-Rumsey (2015), Lim et al. (2011) and Claessens et al. (2013) also add the change in the nominal monetary policy rate to address specification challenges.

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Titel: Assessing macro-prudential policies: the case of FX lending
Publikationsdatum: 09.09.2020
Erschienen in: Journal of Economics and Finance / Ausgabe 2/2021
Print ISSN: 1055-0925
Elektronische ISSN: 1938-9744
DOI: https://doi.org/10.1007/s12197-020-09524-6

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