IMF Working Papers

Macro-Prudential Policies to Mitigate Financial System Vulnerabilities

Author/Editor:

Stijn Claessens ; Swart R. Ghosh ; Roxana Mihet

Publication Date:

August 19, 2014

Electronic Access:

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Summary:

Macro-prudential policies aimed at mitigating systemic financial risks have become part of the policy toolkit in many emerging markets and some advanced countries. Their effectiveness and efficacy are not well-known, however. Using panel data regressions, we analyze how changes in balance sheets of some 2,800 banks in 48 countries over 2000–2010 respond to specific macro-prudential policies. Controlling for endogeneity, we find that measures aimed at borrowers––caps on debt-to-income and loan-to-value ratios––and at financial institutions––limits on credit growth and foreign currency lending––are effective in reducing asset growth. Countercyclical buffers are little effective through the cycle, and some measures are even counterproductive during downswings, serving to aggravate declines, consistent with the ex-ante nature of macro-prudential tools.

Series:

Working Paper No. 2014/155

Subject:

Balance of payments Banking Capital account Credit Emerging and frontier financial markets Financial markets Financial statements Monetary policy Money Public financial management (PFM) Reserve requirements