An Excerpt from Asian Development Bank's
Global Outlook 2015 Report
Cover Art Attribute: A view of the iconic Fullerton Hotel and Cavenagh Bridge, as seen from the
Anderson Bridge, with Singapore's Financial District in the background / Flickr CC
Before the
global financial crisis, bank monitoring focused primarily on prudential risks
to individual institutions and failed to consider that a buildup of
macroeconomic risks and vulnerabilities could pose systemic risk by severely
affecting a number of institutions simultaneously. The global financial
crisis highlighted the need for national bank supervisory authorities to
improve surveillance systems and better detect early on the buildup of
macroeconomic risks that could threaten the financial system. This requires
strong macroprudential policy that includes measures to prevent periods of
instability or crisis, as well as a rich set of instruments to alleviate
financial risks that stem from vulnerabilities building up in the broader
financial system, be they related to credit, liquidity, or capital.
The Basel
Committee on Banking Supervision is increasingly
guided by the need for a macroprudential perspective on financial regulation. Although
much progress has been made on the
regulatory front—especially with Basel
III tightening of the rules on the quantity and quality of bank capital, requiring for example a
countercyclical capital buffer—regulations
apply to only some financial institutions.
In contrast, macroprudential policy aims to limit the buildup of risk in the entire financial
system and enhance its resilience
following shocks. Efforts are mainly to identify systemic threats to financial markets that
could affect the real economy, and so
avoid another financial crisis.
Macroprudential
policy measures fall into the following three broad categories (Lim et al.
2011):
- Credit controls, including caps on ratios of loan to value and of debt to income and on foreign currency lending, as well as ceilings on credit or credit growth;
- Liquidity regulations, which place limits on net open currency positions or currency mismatches and on maturity mismatches, while establishing reserve requirements; and
- Capital requirements, including countercyclical capital requirements, time-varying/dynamic provisioning, and restrictions on profit distribution.
Macroprudential
tools such as minimum capital ratios and loan-to-value ratios have been used
for some time. Compared with some other regions, Asia has long experience in
implementing a variety of macroprudential measures to prevent or address asset
price bubbles or other threats to financial stability. This experience is
derived primarily from dealing with previous threats to financial stability,
especially arising from volatile capital flows
Can
macroprudential policies keep Asian financial systems stable?
In theory,
macroprudential measures can safeguard the stability of the banking system and
the broader financial system by mitigating risks that affect the entire
financial system and therefore the economy. The question is, as always, whether
they actually work in practice. This section presents the basic framework of an
empirical analysis to gauge how effectively macroprudential policies control
credit growth, leverage growth, and housing price appreciation.
Two significant
findings emerge. Broadly, macroprudential policies can indeed promote financial
stability in Asia. More specifically, different types of macroprudential
policies are more effective against different types of macroeconomic risks. For
example, the results suggest that credit-related macroprudential policy
dampens credit growth in India, liquidity-related macroprudential policy reins
in leverage growth in Indonesia, and credit-related macroprudential policy
helps to control housing price escalation in the Republic of Korea.
Responses to
selected macroprudential policies in selected economies
The general
pattern across the region suggests that credit-related macroprudential policies
can effectively dampen credit expansion and housing price inflation, while
liquidity-related macroprudential policy tools moderate leverage growth and
housing price escalation. The salient implication for Asian financial
regulators is that, while they should explore the use of macroprudential
policies, they should assess which exact policies are appropriate for the
particular macroprudential risk they face.
Download : ADB's Global Outlook 2015 Report
Publication Details:
This article is a part of a chapter for Asian
Development Outlook 2015
Creative Commons Attribution 3.0 IGO license (CC BY
3.0 IGO)
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