Macroprudential Regulation as Part of the Mexican Policy Toolkit

The objective of this work is to assess the effect of implementing countercyclical macroprudential regulation in Mexico with the objective of verify whether this type of policy is welfare-improving. Using a DSGE model, two kinds of macroprudential rules are tested: countercyclical bank capital requirements and countercyclical loan-to-value ratios. Results suggest that these rules are welfare-improving and avoid the formation of credit bubbles as well as facilitate loans in the presence of macroeconomic crises. Results suggest that the use of countercyclical rules is effective in keeping the debt level according to its long-term equilibrium. This paper presents a theoretical framework to analyze banking regulation for policy purposes and is the first attempt to analyze countercyclical regulation in Mexico using a microfounded model. Results can be used to rationalize the use of macroprudential tools during the COVID‑19 pandemic given the current interventions in the Mexican banking system. © 2021 The Author(s).

Does macroprudential policy alleviate the adverse impact of COVID-19 on the resilience of banks?

This paper examines the resilience of banks as perceived by market participants during the COVID-19 crisis. We analyse how bank stock returns during January-March 2020 relate to the pre-crisis activation of macroprudential policy across 52 countries in a cross-sectional dimension. We find that, overall, a tighter macroprudential policy stance is beneficial for bank systemic risk, as assessed by equity market investors. A robust finding is that a perceived decrease in bank risk stems primarily from the use of credit growth limits, reserve requirements, and dynamic provisioning. By contrast, a pre-crisis build-up of capital surcharges on systemically important financial institutions seems to lower bank stock returns. Alternative bank risk indicators suggest that the latter is likely to be driven by concerns about profits rather than the probability of default.

The Implementation of Borrower-Based Measures: The Case of the Czech Republic

The article deals with the implementation of borrower-based measures within the framework of the macroprudential policy in the Czech Republic. The contribution is threefold. Firstly, we show the activation of instruments relating to mortgage market and house price development, which have gained strong growth during the last 5 years. Secondly, we discuss the Czech National Bank’s reaction to the COVID-19 crisis in the form of active instruments targeted at borrowers, which led to the abolition of debt-to-income (DTI) and debt-service-to-income (DSTI) ratios. Finally, we provide a view on the effort to incorporate these instruments into the national legal framework. © 2022, The Author(s), under exclusive license to Springer Nature Switzerland AG.

MACROPRUDENTIAL POLICY CONTRIBUTION TO THE POST-COVID-19 PANDEMIC ECONOMIC RECOVERY

Introduction: The COVID-19 crisis is a major shock to the global economy, with serious repercussions on financial markets. Most economies, especially high-income ones, have made considerable efforts, including financial ones, to stimulate aggregate demand in the face of a loss of income on the one hand and to maintain the production potential of companies on the other. This fact required the intervention through various instruments on the money market, but also the mention of the money creation capacity of the banks through the lending mechanism. Apparently, this should have affected the stability of banking systems by increasing the credit risk assumed, but this was avoided because banks are better capitalised and the regulatory framework, including the macroprudential one, was strengthened after the financial crisis of 2007– 2009. Therefore, the national authorities had sufficient leeway to respond to the recession and market instability caused by the pandemic by relaxing prudential requirements. Aim: A theoretical review of literature and good practice of developed banking systems on how macroprudential policy can supplement expansionary monetary policy in overcoming the pandemic crisis. Identifying the risks for the excessive use of relaxed macroprudentialism and formalising recommendations to combine it with monetary policy instruments to overcome stressful situations for banking systems. Method: In order to study the subject approached in this chapter, there were applied the following research methods, such as analysis and synthesis of conceptual approaches of macroprudentiality and the tools they use, deduction and induction, in order to elucidate the influencing factors using the relaxation of macroprudentiality in the context of pandemic crisis and research on the high-income states experience in order to formulate conclusions and opinions. Findings: The authors find that countries have responded quickly to the outbreak of the crisis by easing capital and liquidity requirements, or at least refraining from the previously planned tightening. At the same time, the authors noticed that loan-based measures and minimum reserve requirements were rarely relaxed and risk weights were not changed at all. Originality of the Study: The correlation of different monetary and macroprudential policy instruments in the need to relax them, the analysis of possible risks and the formulation of conclusions on the usefulness of applying these methods to solve the economic effects of the COVID-19 pandemic. Implications: Our results suggest that the macroprudential instruments can only be applied if banking systems have previously succeeded in consolidating the capitalisation of banks. A restrictive macroprudential policy can create premises for the use of excess capital in situations such as that generated by the pandemic, but it is recommended only to economies where overregulation does not affect development in periods of normal evolution. © 2022 by Emerald Publishing Limited.

How to calm down the markets? The effects of COVID-19 economic policy responses on financial market uncertainty.

Financial markets during the COVID-19 pandemic are characterized by a prolonged period of increased uncertainty. In this paper, we analyse how the announcements of policy interventions and responses, to buffer short-term economic impact of the pandemic and offset financial turmoil, have affected the level of realized volatility in 23 countries. Under the augmented heterogeneous autoregressive model framework, we show that the international calming effect of COVID-19 economic policy actions originates from the US macroprudential policy announcements.

The economics of COVID-19 pandemic: A survey.

Through a survey of the literature on the economics of the coronavirus (COVID-19) pandemic, this study explores the effects of the pandemic and proposes potential policy directions to mitigate its effects. Our survey reveals that adverse economic effects have been observed due to the COVID-19 pandemic in addition to fatalities. Furthermore, the survey indicates the need for greater coordination at national and international levels. This study concludes by suggesting coordination among monetary, macroprudential, and fiscal policies (trio) to mitigate the adverse economic effects of COVID-19. Finally, this study explores potential directions for future research.

Macroprudential policy and the probability of a banking crisis.

The ultimate purpose of macroprudential policy is to avoid financial instability, such as banking crises, which have a long-lasting and devastating effect on the economy. Although a growing number of studies have examined the effects of macroprudential policy on credit growth, few empirical studies have analyzed its effect on the probability of a banking crisis. Does macroprudential policy actually affect the probability of a banking crisis? Do other macroeconomic policies matter for the effectiveness of macroprudential policy? To answer these questions, this paper empirically investigates the effect of macroprudential policy on the probability of a banking crisis and its relationship with other macroeconomic policies. Specifically, using data on 65 countries from 2000 to 2016, we employ a probit model to analyze the effect of changes in the loan-to-value (LTV) ratio on crisis probability. Our results show that macroprudential policy is effective in changing the probability of a banking crisis via a credit channel and that its effectiveness depends on other macroeconomic policies. Changes in the LTV ratio are found to be effective in influencing the probability of a banking crisis in countries that have inflation targeting frameworks, floating exchange rate regimes, and/or no capital controls. Our results underscore the importance of policy coordination among different government bodies to design an appropriate macroprudential policy, especially in the current context of the Covid-19 crisis.