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The Banking Sector Under Financial Stability
Type: Book
ISBN: 978-1-78769-681-5

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Book part
Publication date: 25 July 2019

Perry Warjiyo and Solikin M. Juhro

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Central Bank Policy: Theory and Practice
Type: Book
ISBN: 978-1-78973-751-6

Abstract

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Central Bank Policy: Theory and Practice
Type: Book
ISBN: 978-1-78973-751-6

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Article
Publication date: 13 November 2017

Stephan Fahr and John Fell

The global financial crisis demonstrated that monetary policy alone cannot ensure both price and financial stability. According to the Tinbergen (1952) rule, there was a…

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Abstract

Purpose

The global financial crisis demonstrated that monetary policy alone cannot ensure both price and financial stability. According to the Tinbergen (1952) rule, there was a gap in the policymakers’ toolkit for safeguarding financial stability, as the number of available policy instruments was insufficient relative to the number of policy objectives. That gap is now being closed through the creation of new macroprudential policy instruments. Both monetary policy and macroprudential policy have the capacity to influence both price and financial stability objectives. This paper develops a framework for determining how best to assign instruments to objectives.

Design/methodology/approach

Using a simplified New-Keynesian model, the authors examine two sets of policy trade-offs, the first concerning the relative effectiveness of monetary and macroprudential policy instruments in achieving price and financial stability objectives and the second concerning trade-offs between macroprudential policy instruments themselves.

Findings

This model shows that regardless of whether the objective is to enhance financial system resilience or to moderate the financial cycle, macroprudential policies are more effective than monetary policy. Likewise, monetary policy is more effective than macroprudential policy in achieving price stability. According to the Mundell (1962) principle of effective market classification, this implies that macroprudential policy instruments should be paired with financial stability objectives, and monetary policy instruments should be paired with the price stability objective. The authors also find a trade-off between the two sets of macroprudential policy instruments, which indicates that failure to moderate the financial cycle would require greater financial system resilience.

Originality/value

The main contribution of the paper is to establish – with the help of a model framework – the relative effectiveness of monetary and macroprudential policies in achieving price and financial stability objectives. By so doing, it provides a rationale for macroprudential policy and it shows how macroprudential policy can unburden monetary policy in leaning against the wind of financial imbalances.

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Journal of Financial Regulation and Compliance, vol. 25 no. 4
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 10 August 2020

Tomáš Konečný and Lukáš Pfeifer

This paper aims to focus on capital-related macroprudential policies in the context of recent policy discussions on the removal of barriers to the mobility of capital and…

Abstract

Purpose

This paper aims to focus on capital-related macroprudential policies in the context of recent policy discussions on the removal of barriers to the mobility of capital and liquidity of cross-border banks in the European Union (EU).

Design/methodology/approach

This study first discusses the link between financial stability and internal resource mobility of cross-border banks. Then, it examines past heterogeneity in structural capital buffers as key macroprudential capital instruments applied in the EU and relate them to costs of policy action, degree of foreign penetration and membership in the Banking Union.

Findings

Observed phase-in patterns of structural capital buffers in the EU are broadly consistent with costs of policy action, degree of foreign penetration and membership in the Banking Union as potential factors. The process of financial integration could be further enhanced through reduced uncertainty in the application of macroprudential policies that constrain capital mobility of cross-border banks.

Originality/value

This paper anchors macroprudential policies into a wider discussion on the mechanism and implications of ring-fencing in the EU over time. It discusses two policy areas, macroprudential policies and proposals for deeper financial integration, that share the same financial stability objective but tend to emphasize different implications of the mobility of capital and liquidity of cross-border banks in the EU. The study provides a discussion of potential implications of the recent adoption of the CRRII/CRDV legislation for future heterogeneity of macroprudential policies in the EU.

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Journal of Financial Regulation and Compliance, vol. 29 no. 2
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 10 July 2017

Yuanyan Zhang and Thierry Tressel

The design of a macro-prudential framework and its interaction with monetary policy has been at the forefront of the policy agenda since the global financial crisis…

Abstract

Purpose

The design of a macro-prudential framework and its interaction with monetary policy has been at the forefront of the policy agenda since the global financial crisis. However, most advanced economies (AEs) have little experience using macroprudential policies. As a result, relatively little is known empirically about macroprudential instruments’ effectiveness in mitigating systemic risks in these countries, about their channels of transmission, and about how these instruments would interact with monetary policy. This paper aims to fill in the gap.

Design/methodology/approach

The authors develop a new approach using the euro area bank lending survey to assess the effectiveness of macro-prudential policies in containing credit growth and house price appreciation in mortgage markets. Estimation is performed under the panel regressions (OLS, GLS) and panel VAR setup. Endogeneity issues arising from measures of macro-prudential policies are addressed by introducing GMM estimation and various instruments.

Findings

The authors find instruments targeting the cost of bank capital most effective in slowing down mortgage credit growth, and that the impact is transmitted mainly through price margins, the same banking channel as monetary policy. Limits on loan-to-value ratios are also effective, especially when monetary policy is excessively loose.

Originality/value

With limited data on macroprudential policy measures in the AEs, this paper proposed a new methodology of using answers from bank lending survey as proxies to assess the effectiveness of specific macroprudential measures and their transmission channels.

Details

Journal of Financial Regulation and Compliance, vol. 25 no. 3
Type: Research Article
ISSN: 1358-1988

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Book part
Publication date: 25 July 2019

Perry Warjiyo and Solikin M. Juhro

Abstract

Details

Central Bank Policy: Theory and Practice
Type: Book
ISBN: 978-1-78973-751-6

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Article
Publication date: 12 April 2019

Emilio Gallego Neira and Carlos Martínez de Ibarreta

This paper aims to analyze the effectiveness of macroprudential and fiscal policies taken from a sample of ten advanced economies in relation to the mitigation of…

Abstract

Purpose

This paper aims to analyze the effectiveness of macroprudential and fiscal policies taken from a sample of ten advanced economies in relation to the mitigation of real-estate and credit bubbles by comparing their performance.

Design/methodology/approach

This comparison is elaborated with a seemingly unrelated regression methodology, which allows the assessment of individual countries’ performance and improves the estimation of the dependent variables versus an individual regression.

Findings

The analysis concludes that countercyclical measures have been more effective to control the growth of household debt. Furthermore, this study validates that macroprudential measures focused on the residential sector meet their objective of controlling the growth of house prices, whereas those macroprudential measures with more generic targets are effective to control the growth of household debt.

Originality/value

As opposed to previous panel-regression studies, which have analyzed the performance of macroprudential and fiscal measures in generic terms, this paper compares the performance of these tools in ten advanced economies. Based on the analysis performed, several recommendations are derived for policymakers.

Details

Journal of Financial Regulation and Compliance, vol. 27 no. 4
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 15 May 2017

Essi Eerola

The global financial crisis has led to increased attention on the relationship of household indebtedness and systemic risks. As a result, macroprudential measures aimed at…

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409

Abstract

Purpose

The global financial crisis has led to increased attention on the relationship of household indebtedness and systemic risks. As a result, macroprudential measures aimed at reducing the risks have been introduced in many countries. The purpose of this paper is to review the recent empirical literature on the measures targeted at households in the housing markets.

Design/methodology/approach

This note reviews and discusses the recent empirical literature on macroprudential measures targeted at households in the housing market as well as housing-related tax policy measures.

Findings

To date, the literature mostly consists of cross-country studies using aggregate data and looking at a large set of different measures. The studies typically report associations between the measures and the outcome variables of interest (often credit growth and house price appreciation), but do not assess the causal effects of the different measures or the underlying mechanisms.

Originality/value

Exploiting household data together with policy reforms should be a useful step forward in understanding the effects of the measures and uncovering the mechanisms through which they operate. This would also allow studying the distributional effects of the measures. Understanding the distributional effects is important in its own right, but it is also required because the ultimate goals of the macroprudential policies are related not only to the aggregate level of credit but also to the distribution of leverage.

Details

The Journal of Risk Finance, vol. 18 no. 3
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 28 January 2020

Saibal Ghosh

Using bank-level data on MENA countries during 2000-2016, this study aims to examine the role and relevance of macroprudential policies in affecting depositor discipline.

Abstract

Purpose

Using bank-level data on MENA countries during 2000-2016, this study aims to examine the role and relevance of macroprudential policies in affecting depositor discipline.

Design/methodology/approach

The author uses the dynamic panel data methodology as compared to alternate techniques, owing to the ability of this technique to effectively address the endogeneity problem of some of the independent variables.

Findings

The findings suggest that market discipline for MENA banks occurs primarily through deposit rates. During the crisis, depositors typically focus on a catch-all measure of bank performance. Second, macroprudential policies play a role in influencing market discipline. Third, the behavior of depositors in exercising market discipline is more pronounced in countries with high Islamic banking share and works mainly through the price channel.

Originality/value

To the best of author’s knowledge, this is one of the early studies for MENA countries to examine this issue in a systematic manner. By focusing on an extended sample of MENA country banks covering an extensive period that subsumes the global financial crisis, author’s analysis is able to shed light on the relevance of macroprudential policies in affecting depositor discipline.

Details

Journal of Islamic Accounting and Business Research, vol. 11 no. 8
Type: Research Article
ISSN: 1759-0817

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