Macroprudential Policies
Paper Session
Sunday, Jan. 3, 2021 12:15 PM - 2:15 PM (EST)
- Chair: Charles (Rich) Higgins, Colgate University
Risk-Taking, Banking Crises, and Macroprudential Monetary Policy
Abstract
Recent evidence from the Global Financial Crisis suggests two key features; financial crises are typically preceded by risk-taking by banks that lay the seeds for the subsequent financial crisis. Secondly, banks tend to increase their risk on their asset holdings when credit spreads in markets shrunk (search for yield).If interest rate can alter the risk-taking by banks through credit spreads, how should central bank set the interest rate during booms to reduce the expected welfare loss caused by a financial panic? We address this question by investigating the macroprudential aspect of monetary policy when banks' risk-choice and vulnerability to bank-run are endogenous. In particular, our model shows that when credit spreads are low, banks have an incentive to hold riskier assets. It generates the self-fulfilling vulnerability toward financial panic as inter-bank lenders and depositors expect a higher probability of bank-run.
Furthermore, the model highlights a macroprudential role for monetary policy. In times of credit boom, through the bank-lending channel of monetary policy, higher interest rates moderate the shrunk of credit spreads. Hence, the modified counter-cyclical interest rates can reduce the vulnerability to the bank-run.
Macroprudential Policy Interactions in a Sectoral DSGE Model with Staggered Interest Rates
Abstract
We develop a two-sector DSGE model with a detailed banking sector along the lines ofClerc et al. (2015) to assess the impact of macroprudential tools (minimum, countercyclical
and sectoral capital requirements, as well as a loan-to-value limit) on key macroeconomic
and financial variables. The banking sector features residential mortgages and corporate
lending subject to staggered interest rates à la Calvo (1983), which is motivated by the
sluggish movement of lending rates due to fixed interest rate loan contracts. Other distortions
in the model include limited liability, bankruptcy costs and penalty costs for
deviations from regulatory capital. We estimate the model using Bayesian methods based
on quarterly U.K. data over 1998Q1-2016Q2. Our contributions are threefold. We show
that: (i) coordination of macroprudential tools may have a welfare-improving effect, (ii)
macroprudential tools would have improved some macroeconomic indicators but not have
prevented the Global Financial Crisis altogether, (iii) staggered interest rates may alter
the transmission of macroprudential tools that work through interest rates.
Risk-Mitigating Effects of Being Prompt and Transparent
Abstract
We study ex ante risk-taking by banks in the global market for syndicated U.S. dollar loans in response to U.S. policy rates and potential mitigants of such risk-taking. We focus on the mitigating effects of banks' official supervision; activities restrictions and capital regulation; and private monitoring and external governance. We find remarkably robust evidence of a global risk-taking channel of U.S. monetary policy and of a significant dampening effect on this channel of certain supervisory powers---in particular, prompt corrective power that allows for early intervention, cease and desist orders, and suspension of capital payouts. In a way, we show that microprudential tools have systemic, macroprudential effects. We also find small prudential ``leakages'' because of shadow bank participation in loan originations. Reporting transparency, but not the other mitigants, have robust dampening effects too. We conclude that supervisory stringency and reporting transparency may materially reduce financial stability risks from corporate leveraged debt by slowing down its build-up.Optimal Macroprudential Policy and Asset Price Bubbles
Abstract
An asset bubble relaxes collateral constraints and increases borrowing by credit-constrained agents. At the same time, as the bubble deflates when constraints start binding, it amplifies downturns. We show analytically and quantitatively that macroprudential policy should optimally respond to building asset price bubbles non-monotonically depending on the underlying level of indebtedness. If the level of debt is moderate, policy should accommodate the bubble to reduce the incidence of a binding collateral constraint. If debt is elevated, policy should lean against the bubble more aggressively to mitigate the pecuniary externalities from a deflating bubble when constraints bind.Macroprudential Policies and Brexit: A Welfare Analysis
Abstract
Brexit will bring many economic and institutional consequences. Among other, Brexit will have implications on financial stability and the implementation of macroprudential policies. One immediate effect of Brexit is the fact that the United Kingdom (UK) will no longer be subject to the jusrisdiction of the European Supervisory Authorities (ESAs) nor the European Systemic Risk Board (ESRB). This paper studies the welfare implications of this change of regime, both for the UK and the European Union (EU). By means of a Dynamic Stochastic General Equilibrium model (DSGE), I compare the pre-Brexit scenario with the new one, in which the UK sets macroprudential policy independently. I find that, after Brexit, the UK is better off by setting its own macroprudential policy without taking into account Europe's welfare as a whole. Given the small relative size of the UK, this implies just slight welfare loss in the EU.JEL Classifications
- E0 - General