The Impact of Macroprudential Policy Instruments on Financial Stability in Southern Europe
Abstract
This paper is a contribution to the body of research examining the impact of macroprudential policy instruments on financial stability. The following hypothesis was tested (H1): Macroprudential policy instruments (household borrowing costs; interbank loans as a percentage of total loans; loan to deposit ratio; leverage ratio; and solvency ratio) enhance financial stability, as measured by credit growth, in four southern European economies (Greece, Italy, Portugal and Spain) from Q4 2010 to Q4 2018. The empirical results of this study suggest that, of the investigated macroprudential policy instruments, household borrowing costs, interbank loans as a percentage of total loans and loan to deposit ratio exhibit the predicted impact on credit growth rate. Leverage ratio and solvency ratio do not exhibit the expected impact on the response variable. Moreover, only three out of the five explanatory variables are statistically significant in the model. Consequently, it is not possible to confirm or reject the hypothesis based on the available data and results.
Downloads
References
Akinci, O., Olmstead-Rumsey, J. (2018). How effective are macroprudential policies? An empirical investigation. Journal of Financial Intermediation, 33, 33-57. http://doi.org/10.1016/j.jfi.2017.04.001
Alam, Z., Alter, A., Eiseman, J., Gelos, G., Kang, H., Narita, M., Nier, E., Wang, N. (2019). Digging Deeper – Evidence on the Effects of Mac- roprudential Policies from a New Database. IMF Working Paper, WP/19/66.
Allison, P. (2009). Fixed Effects Regression Models. Thousand Oaks, CA: Sage Publications. ISBN 978-0761924975. Alper, K., Binici, M., Demiralp, S., Kara, H., Ozlu, P. (2014). Reserve Requirements, Liquidity Risk, and Credit Growth. Working Paper No.14/24. Central Bank of the Republic of Turkey. Retrieved from https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Research/Working+Paperss/2014/14-24.
Altunbas, Y., Binici, M., Gambacorta, L. (2017). Macroprudential policy and bank risk. Bank for International Settlements: BIS Working Papers No.646.
Arregui, N., Beneš, J., Krznar, I., Mitra, S., Oliveira Santos, A. (2013). Evaluating the Net Benefits of Macroprudential Policy: A Cookbook. IMF Working Paper, WP/13/167.
Bambulović, M., Valdec, M. (2020). Testing the characteristics of macroprudential policies’ differential impact on foreign and domestic banks’ lending in Croatia. Public Sector Economics, 44(2), 221-249. https://doi.org/10.3326/pse.44.2.4
Basten, C., Koch, C. (2015). Higher bank capital requirements and mortgage pricing: Evidence from the countercyclical capital buffer (CCB). BIS Working Papers, No.511.
Beck, T., Gambacorta, L. (2020). Editorial: New evidence on the effectiveness of macroprudential policies. Journal of Financial Intermedi- ation, 42, 100834. https://doi.org/10.1016/j.jfi.2019.100834
Borio, C. (2011). Implementing the macroprudential approach to financial regulation and supervision, in Green, C. J., Pentecost, E. J., Weyman-Jones, T., ed., The Financial Crisis and the Regulation of Finance. Edward Elgar: Cheltenham, UK, chapter 7. ISBN 978-1- 84980-870-5.
Carreras, O., Davis, P. E., Piggott, R. (2018). Assessing macroprudential tools in OECD countries within a cointegration framework. Journal of Financial Stability, 37(C), 112-130. https://doi.org/10.1016/j.jfs.2018.04.004
Cerutti, E., Claessens, S., Laeven, L. (2017). The use and effectiveness of macroprudential policies: New evidence. Journal of Financial Stability, 28, 203-224. https://doi.org/10.1016/j.jfs.2015.10.004
Cerutti, E., Correa, R., Fiorentino, E., Segalla, E. (2017). Changes in prudential policy instruments – a new cross-country database. Inter- national Journal of Central Banking, 13(1), 477–503. http://dx.doi.org/10.5089/9781475574517.001.
Cerutti, E., Dagher, J., Dell’Ariccia, G. (2015). Housing Finance and Real-estate Boom: A Cross-country Perspective. IMF Staff Discussion Note 15/12.
Cizel, J., Frost, J., Houben, A., Wierts, P. (2019). Effective Macroprudential Policy: Cross-Sector Substitution from Price and Quantity Measures. Journal of Money, Credit and Banking, 51(5), 1209-1235. https://doi.org/10.1111/jmcb.12630
Claessens, S., Ghosh, S. R., Mihet, R. (2013). Macro-Prudential Policies to Mitigate Financial System Vulnerabilities. Journal of Internation- al Money and Finance, 39(C), 153-185. https://doi.org/10.1016/j.jimonfin.2013.06.023
Claessens, S. (2014). An Overview of Macroprudential Policy Tools. IMF Working Paper WP/14/214.
Constâncio, V. (2016). Principles of Macroprudential Policy. Speech at the ECB-IMF Conference on Macroprudential Policy, Frankfurt am Main, 26 April 2016.
Davis, P. E., Liadze, I., Piggott, R. (2019). Assessing the macroeconomic impact of alternative macroprudential policies. Economic Modelling, 80, 407-428. https://doi.org/10.1016/j.econmod.2018.11.025.
Drehmann, M., Gambacorta, L. (2012). The effects of countercyclical capital buffers on bank lending. Applied Economics Letters, 19(7), 603-608. https://doi.org/10.1080/13504851.2011.591720.
Ely, R. A., Tabak, B. M., Teixeira, A. M. (2021). The transmission mechanisms of macroprudential policies on bank risk. Economic Modelling, 94, 598-630. https://doi.org/10.1016/j.econmod.2020.02.005.
Ercegovac, R., Klinac, I., Zdrilić, I. (2020). Bank specific determinants of EU banks profitability after 2007 financial crisis. Journal of Con- temporary Management Issues, 25(1), 89-102. https://doi.org/10.30924/mjcmi.25.1.5.
Festić, M. (2006). Procyclicality of Financial and Real Sector in Transition Economies. Prague Economic Papers, 15(4), 315-349. https://doi.org/10.18267/j.pep.291.
Festić, M. (2015). The Stability of the Credit Supply in the Globalized Banking Sector Environment: The Case of the EU New Member States-10. Prague Economic Papers, 24(4), 386– 398. https://doi.org/10.18267/j.pep.543.
Festić, M., Kavkler, A., Repina, S. (2011). The macroeconomic sources of systemic risk in the banking sectors of five new EU member states. Journal of Banking and Finance, 35, 310-322. https://doi.org/10.1016/j.jbankfin.2010.08.007
Festić, M., Romih, D. (2008). Cyclicality of the Banking Sector Performance and Macro Environment in the Czech Republic, Slovakia and Slovenia. Prague Economic Papers, 17(2), 99-117, https://doi.org/10.18267/j.pep.323
Gadatsch, N., Mann, L., Schnabel, I. (2018). A new IV approach for estimating the efficacy of macroprudential measures. Economic Letters, 168(C), 107-109. https://doi.org/10.1016/j.econlet.2018.04.015
Galati, G., Moessner, R. (2014). What Do We Know About the Effects of Macroprudential Policy? DNB Working Paper 440. Netherlands Central Bank.
Gambacorta, L., Murcia, A. (2020). The impact of macroprudential policies in Latin America: An empirical analysis using credit registry data. Journal of Financial Intermediation, 42, 100828. https://doi.org/10.1016/j.jfi.2019.04.004.
Greenspan, A. (2002). Opening Remarks: Economic Volatility. Symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming.
Greenspan, A. (2011). Dodd-Frank fails to meet test of our times. Op-ed in the Financial Times, March 29.
Group of Ten. (2001). Report on Consolidation in the Financial Sector, Basel. Gujarati, D. (2003). Basic Econometrics (fourth edition). McGraw-Hill: United States.
Hahn, J., Hausman, J. (2002). A New Specification Test for the Validity Instrumental Variables. Econometrica, 70(1), 163-189. https://doi.org/10.1111/1468-0262.00272.
Hausman, J. A. (1978). Specification Test in Econometrics. Econometrica, 46(6), 1251-1272. https://doi.org/10.2307/1913827
Hsiao, C. (1985). Benefits and Limitations of Panel Data. Econometric Reviews, 4, 121-174. https://doi.org/10.1080/07474938508800078 Jakubik, P., Hermanek, J. (2008). Stress Testing of the Czech Banking Sector, Prague Economic Papers, 17(3), 195-212. https://doi.org/10.18267/j.pep.329.
Jeanne, O., Korinek, A. (2020). Macroprudential Regulation Versus Mopping Up After the Crash. The Review of Economic Studies, 87(3), 1470-1,497. https://doi.org/10.1093/restud/rdaa005.
Kim, S., Mehrotra, A. (2017). Managing price and financial stability objectives in inflation targeting economics in Asia and the Pacific.Journal of Financial Stability, 29, 106-116. doi: https://doi.org/10.1016/j.jfs.2017.01.003
Kim, S., Oh, J. (2020). Macroeconomic effects of macroprudential policies: Evidence from LTV and DTI policies in Korea. Japan & The World Economy, 53, 100997, https://doi.org/10.1016/j.japwor.2020.100997
Klinger, T., Teply, P. (2014). Systemic Risk of the Global Banking System – An Agent-Based Network Model Approach. Prague Economic Papers, 23(1), 24-41. https://doi.org/10.18267/j.pep.471.
Kuttner, K. N., Shim, I. (2016). Can non-interest rate policies stabilise housing markets? Evidence from a panel of 57 economies. Journal of Financial Stability, 26(C), 31-44. https://doi.org/10.1016/j.jfs.2016.07.014.
Lim, C. H., Columba, F., Costa, A., Kongsamut, P., Otani, A., Saiyid, M., Wezel, T., Wu, Xiaoyoung. (2011). Macroprudential policy: What Instruments and How to Use Them? Lessons from Country Experiences. IMF Working Paper No.11/238.
Linklaters LLP. (2019a). CRR2 and CRDV – The New EU Prudential Regulatory Landscape. Retrieved from https://www.linklaters.com/en/insights/publications/2019/june/crr2-and-crdv-the-new-eu-prudential-regulatory-landscape.
Linklaters LLP. (2019b). CRR2 and CRDV – The New EU Prudential Regulatory Landscape. Retrieved from https://lpscdn.linklaters.com/pdfs%2Fmkt%2Flondon%2FCRR2_Client_Publication_June_2019.pdf.
Luu, H. N., Vo, X. V. (2020). Macroprudential policy and bank risk-taking behavior: Implications from regulatory stress test. International Review of Financial Analysis, 75, 101586. https://doi.org/10.1016/j.irfa.2020.101586
Ma, C. (2020). Financial stability, growth and macroprudential policy. Journal of International Economics, 122, 103259. https://doi.org/10.1016/j.jinteco.2019.103259.
Meuleman, E., Vander Vennet, R. (2020). Macroprudential policy and bank systemic risk. Journal of Financial Stability, 47(C), 100724. https://doi.org/10.1016/j.jfs.2020.100724.
Morgan, P. J., Regis, P. J., Salike, N. (2019). LTV policy as a macroprudential tool and its effects on residential mortgage loans. Journal of Financial Intermediation, 37, 89-103. https://doi.org/10.1016/j.jfi.2018.10.001.
Murray, M. P. (2006). Avoiding Invalid Instruments and Coping with Weak Instruments. Journal of Economic Perspectives, 20(4), 111-132. https://doi.org/10.1257/jep.20.4.111.
Nakatani, R. (2020). Macroprudential policy and the probability of a banking crisis. Journal of Policy Modelling, 42(6), 1169-1186. https://doi.org/10.1016/j.jpolmod.2020.05.007.
Olszak, M., Roszkowska, S., Kowalska, I.(2018). Macroprudential policy instruments and procyclicality of loan-loss provisions– Cross-coun- try evidence. Journal of International Financial Markets, Institutions & Money, 54, 228-257. https://doi.org/10.1016/j.intfin.2018.01.001
Olszak, M., Roszkowska, S., Kowalska, I. (2019). Do macroprudential policy instruments reduce the procyclical impact of capital ration bank lending? Cross-country evidence. Baltic Journal of Economics, 19(1), 1-38, https://doi.org/10.1080/1406099X.2018.1547565
Poghosyan, T. (2020). How Effective is Macroprudential Policy? Evidence from Lending Restriction Measures in EU Countries. Journal of Housing Economics, 49, 101694. https://doi.org/10.1016/j.jhe.2020.101694
Richter, B., Schularick, M., Shim, I. (2019). The costs of macroprudential policy. Journal of International Economics, 118, 263-282. https://doi.org/10.1016/j.jinteco.2018.11.011
Roncoroni, A., Battiston, S., D’Errico, M., Hałaj, G., Kok, C. (2019). Interconnected banks and systemically important exposures. ECB Working Paper Series, No.2331 / November 2019.
SDW. (2020). European Central Bank: Statistical Data Warehous: CLIFS – Country-Level Index of Financial Stress. Retrieved from: https://sdw.ecb.europa.eu/browseExplanation.donode=9693347#:~:text=CLIFS%20%2D%20Country%2DLevel%20Index%20of%20Financial%20Stress%20(CLIFS)&text=The%20CLIFS%20includes%20six%2C%20mainly,markets%20and%20foreign%20exchange%20markets.
Shim, I., Bogdanova, B., Shek, J., Subelyte, A. (2013). Database for Policy Actions on Housing Markets. BIS Quarterly Review, (September 2013), 83-95.
Szpunar, P. (2017). Institutional and operational aspects of macroprudential policy in central and eastern European EU member states. BIS Papers chapters, in Bank for International Settlements, ed., Macroprudential policy frameworks, implementation and relationships with other policies. Bank for International Settlements, BIS Papers No.94, 289-303.
Valdivia Coria, J. D., Valdivia Coria, D. D. (2019). Leaning against the wind: Effects of macroprudential policy on sectoral growth. Journal of Economics Library, 6(4), 247-266. http://dx.doi.org/10.1453/jel.v6i4.2001
Vandenbussche, J., Vogel, U., Detragiache, E. (2015). Macroprudential policies and housing prices: A new database and empirical evidence for Central, Eastern, and Southeastern Europe. Journal of Money, Credit and Banking, 47(1), 343-377. https://doi.org/10.1111/jmcb.12206
Verbeek, M. (2004). A guide to modern econometrics (2nd ed.). West Sussex: John Wiley & Sons Ltd. Wooldridge, J. M. (2010). Econometric Analysis of Cross Section and Panel Data. Cambridge, MA: MIT Press.
Zhang, L., Zoli, E. (2014). Leaning Against the Wind: Macroprudential Policy in Asia. IMF Working Paper, WP/14/22.
