Macroprudential policy : Drivers, effects and unintended consequences

This thesis consists of an introductory chapter and three self-contained but interrelated essays that explore different dimensions of macroprudential policy. I investigate the drivers, effects and unintended consequences of macroprudential policy, a set of regulatory and supervisory policy measures that policy makers can make use of to shield their economies from financial instability and its detrimental effects to macroeconomic stability and economic growth.

The first essay examines the motives and conditions facing policymakers in decisionson macroprudential policy and capital flow management measures. We first consider theoretical contributions on the optimal use of these policy tools. This discussion is followed by a systematic empirical evaluation of their relative importance in a large sample of countries. We find that strong institutions and robust regulatory regimes are associated with lower reliance on capital flow management and greater use of macroprudential policy. Countries with a large foreign bank presence are generally more reluctant to implement macroprudential and capital flow management measures.

The second essay takes a very granular, careful and precise look at the effects of macroprudential policy, filling multiple gaps in previous research. To be able to zoom in on what happens at the firm and bank level, we investigate the effects of a change in a single policy measure, the countercyclical capital buffer (CCyB). We use confidential loan level data by the European Central Bank to investigate how a change in the countercyclical capital buffer in Germany affected lending to firms. We find significant negative effects from an announcement of an increase in the CCyB rate on bank corporate lending. The effects are very different for firms of different sizes, with SMEs facing more constrained credit supply conditions and higher lending rates after the announcement and application of a change in the CCyB, while larger firms are hardly affected.

The third essay studies how the effects of nationally implemented macroprudential policy spill across borders via international lending. I apply the gravity model of international asset trade to cross-border banking to investigate the size and direction of these spillovers. My findings support the existence of cross-border spillovers from macroprudential policy. Moreover, I find that the overall effect from more macroprudential regulation is highly dependent on the income group of the countries in which banks operate. I argue that the difference may arise from banks having more opportunities for regulatory arbitrage in emerging market economies.

The essays included in this thesis contribute to empirical evidence and understanding on the drivers, effects and unintended consequences of macroprudential policy measures. Their findings are of high policy relevance and can help policymakers make better informed decisions. They also point to multiple avenues for further research.

Contact Anni Norring

Email: anni.norring@bof.fi
LinkedIn: Anni Norring | LinkedIn