FIIT-1: Banks' responses to macroprudential policies
The Aggregate Demand for Bank Capital
1University of Chicago; 2University of Pennsylvania; 3Stockholm School of Economics
We propose a novel conceptual approach to characterizing the credit market equilibrium in economies with multi-dimensional borrower heterogeneity. Our method is centered around a micro-founded representation of borrowers’ aggregate demand correspondence for bank capital. The framework yields closed-form expressions for the composition and pricing of credit, including a sufficient statistic for the provision of bank loans. Our analysis sheds light on the roots of compositional shifts in credit toward risky borrowers prior to the most recent crises in the U.S. and Europe, as well as the macroprudential effects of bank regulations, policy interventions, and financial innovations providing alternatives to banks.
The Anatomy of the Transmission of Macroprudential Policies
1Erasmus University Rotterdam, Netherlands, The; 2Reserve Bank of India; 3Trinity College Dublin; 4University of Michigan; 5Central Bank of Ireland
We analyze the effect of regulatory limits on household leverage on residential mortgage credit, house prices, and banks' portfolio choice. Combining supervisory loan level and house price data, we examine the introduction of loan-to-income and loan-to-value limits on residential mortgages in Ireland. Mortgage credit is reallocated from low- to high-income borrowers and from high- to low-house price appreciation areas, cooling down, in turn, ``hot'' housing markets. Consistent with a bank portfolio choice channel, more-affected banks drive this reallocation and increase their risk-taking in their securities holdings and corporate credit, two asset classes not targeted by the policy.
Macroprudential FX Regulations:Shifting the Snowbanks of FX Vulnerability?
1Bank of England, United Kingdom; 2MIT, NBER, CEPR; 3Bank of Canada
Can macroprudential foreign exchange (FX) regulations on banks reduce the financial and macroeconomic vulnerabilities created by borrowing in foreign currency? To evaluate the effectiveness and unintended consequences of macroprudential FX regulations, we develop a parsimonious model of bank and market lending in domestic and foreign currency and derive four predictions. We confirm these predictions using a rich dataset of macroprudential FX regulations. These empirical tests show that FX regulations: (1) are effective in terms of reducing borrowing in foreign currency by banks; (2) have the unintended consequence of simultaneously causing firms to increase FX debt issuance; (3) reduce the sensitivity of banks to exchange rate movements, but (4) are less effective at reducing the sensitivity of corporates and the broader financial market to exchange rate movements. As a result, FX regulations on banks appear to be successful in mitigating the vulnerability of banks to exchange rate movements and the global financial cycle, but partially shift the snowbank of FX vulnerability to other sectors.