After the great financial crisis, financial institutions are being subjected to stronger regulatory frameworks such as macroprudential regulation pertaining to capital adequacy, liquidity and leverage. Macroprudential policy measures fall into the following three broad categories – (i) credit controls, including caps on loan-to-value (LTV) ratio and debt-to-income (DTI) ratio as well as ceilings on credit or credit growth; (ii) liquidity regulations that place limits on net open currency positions or currency mismatches and on maturity mismatches, while establishing reserve requirements; and, (iii) capital requirements, including countercyclical capital requirements, time-varying and dynamic provisioning and restrictions on profit distribution.
The policy responses taken by SEACEN member economies are heterogeneous as these economies follow a wide range of macroprudential and macroeconomic policy frameworks, ranging from inflation targeting to managed exchange rates, different degrees of financial market development, LTVs, capital requirements, provisioning as well as different degrees of macroeconomic resilience.
This paper presents an empirical framework for analysing how effective macroprudential policies control credit growth. The descriptive analysis shows that there has been significant variation in the use of macroprudential instruments in SEACEN member economies. The use of different macroprudential instruments follows very different trends over time. The application of some instruments, such as limits on credit growth, lending standard restrictions, sectoral risk weights or liquidity requirements, seems to have responded to the financial cycle or to financial crisis events. The general pattern of the evidence from SEACEN economies suggests that credit-related macroprudential policies can effectively dampen credit expansion, while liquidity-related macroprudential policy tools moderate leverage growth. In response to implementation of macroprudential policies, banks reduce loan growth following an increase in capital requirements in the targeted sector. This study finds that changes in macroprudential policies affect lending with heterogeneous responses in different sectors, viz., housing and commercial real estate categories for selected economies.
FOREWORD By Dr. Hans Genberg
AND EXECUTIVE SUMMARY
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