Effectiveness of Macroprudential Policies in Developing Asia: An Empirical Analysis

Abstract

Before the 2008 global financial crisis, bank monitoring focused primarily on risks to individual institutions, or what are generally referred to as prudential risks. Regulators thus failed to consider that a buildup of macroeconomic risks and vulnerabilities could pose systemic risk to the financial sector. The global credit crisis showed the inadequacy of purely prudential surveillance systems and the need for bank supervisors to better detect the buildup of macroeconomic risks before they can threaten the financial system. This article presents an empirical framework for analyzing 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 proved effective for different types of macroeconomic risks.

KEY WORDS:

• developing Asia
• financial stability
• macroprudential policy

Notes

1. Other tools such as limits on profit redistribution could also have countercyclical buffer effects helping banks’ willingness to maintain or at least reduce their balance sheets during recessions. More generally, there are reasons to doubt that these tools will usually be effective, particularly in countries that have fully liberalized capital accounts and otherwise quite liberal financial sectors.

2. Over the past two decades, the HKMA has used limits on the LTV ratio as one type of targeted policy tool to manage banks’ credit exposures to the property market and to lean against the amplitude of property price cycles. In the 1990s, a maximum LTV ratio of 70 percent was applied to all property types, then more differentiated ratios were introduced over time, depending on the property type and its value.

3. In February 2013, the government doubled the rates of existing ad valorem stamp duties for transactions for all types of properties except for local individuals who did not own any other residential property in Hong Kong, China at the time of acquisition. That seemed to have helped to moderate housing price inflation for a short period only. Elevated valuations at historically high levels indicate that it is premature to conclude that the risk of a collapse in housing prices has been averted

4. In 2010, the rupiah reserve requirement was increased from 5 percent to 8 percent to absorb domestic liquidity and to enhance the liquidity management of the banks without exerting a negative impact on the lending needed to stimulate growth. In 2012, authorities introduced LTV for lending for automobiles and property and also tightened standards for credit cards to reduce excessive lending to these sectors while maintaining overall lending growth consistent with the macroeconomic outlook.

5. Bank of Indonesia Annual Reports 2004, 2009, and 2010.

6. The non-banking financial companies.

7. Later, with a housing boom becoming apparent, government authorities introduced limits on the LTV and DTI ratios in order to stabilize housing prices.

8. The situation of the Republic of Korea in the 2000s provides a basis for evaluating several macroprudential measures from various viewpoints. The choices of options—such as single versus multiple measures, broad-based versus targeted risks, or fixed versus time-varying applications—can also impact macroprudential policy effectiveness (Lim et al. 2011).

9. In 2011, authorities imposed a levy of up to 0.2 percent on bank noncore financial liabilities to manage speculative inflows of foreign capital (IMF 2012).

10. BNM raised the reserve requirement ratio by one percentage point per quarter from 1 percent in Q1 2011 to 4 percent in Q3 of that year. In 2012, the government issued Guidelines on Responsible Financing to promote prudent, responsible, and transparent retail financing practices as well as to ensure that the household sector and credit market remained resilient.

11. The International Monetary Fund’s Financial Sector Assessment Program for Singapore conducted in November 2013 recommended that Singapore enhance its existing supervisory and regulatory frameworks, further develop its crisis management arrangements, and remain vigilant over credit growth.

12. Moreover, MAS required Singapore-incorporated banks to meet the Basel III minimum standards by 1 January 2013 ahead of the January 2015 timeline. Taking into account the capital conservation buffer requirement of 2.5 percent, Singapore-incorporated banks should maintain at least 9 percent common equity tier 1 compared to the Basel III minimum of 7 percent.

13. Bank of Thailand Annual Reports 2003 and 2010.

14. At 122 percent of disposable income, households are the most indebted in developing Asia with the exception of those in the Republic of Korea.

15. Recently, the BSP revealed that Philippine bank exposure to real estate had increased by 2.9 percent at the end of March 2014 compared to the end of December 2013. The Monetary Board, the major policymaking body of the BSP, approved major amendments to regulations governing credit-risk taking activities of banks and quasi-banks after a comprehensive policy review done by the BSP. Thus, the BSP announced major policy changes regarding the cap on bank lending to 60 percent of collateral value, down from 80 percent previously.