Effectiveness and channels of macroprudential policies: lessons from the Euro area

2017 ◽  
Vol 25 (3) ◽  
pp. 271-306 ◽  
Author(s):  
Yuanyan Zhang ◽  
Thierry Tressel
Keyword(s):  
Monetary Policy ◽  
Euro Area ◽  
Global Financial Crisis ◽  
Bank Lending ◽  
Panel Var ◽  
Bank Capital ◽  
Credit Growth ◽  
Content Type ◽  
Macroprudential Policies ◽  
The Impact

Purpose The design of a macro-prudential framework and its interaction with monetary policy has been at the forefront of the policy agenda since the global financial crisis. However, most advanced economies (AEs) have little experience using macroprudential policies. As a result, relatively little is known empirically about macroprudential instruments’ effectiveness in mitigating systemic risks in these countries, about their channels of transmission, and about how these instruments would interact with monetary policy. This paper aims to fill in the gap. Design/methodology/approach The authors develop a new approach using the euro area bank lending survey to assess the effectiveness of macro-prudential policies in containing credit growth and house price appreciation in mortgage markets. Estimation is performed under the panel regressions (OLS, GLS) and panel VAR setup. Endogeneity issues arising from measures of macro-prudential policies are addressed by introducing GMM estimation and various instruments. Findings The authors find instruments targeting the cost of bank capital most effective in slowing down mortgage credit growth, and that the impact is transmitted mainly through price margins, the same banking channel as monetary policy. Limits on loan-to-value ratios are also effective, especially when monetary policy is excessively loose. Originality/value With limited data on macroprudential policy measures in the AEs, this paper proposed a new methodology of using answers from bank lending survey as proxies to assess the effectiveness of specific macroprudential measures and their transmission channels.

The macroeconomic impact of shocks to bank capital buffers in the Euro Area

2019 ◽  
Vol 20 (1) ◽  
Author(s):  
Derrick Kanngiesser ◽  
Reiner Martin ◽  
Laurent Maurin ◽  
Diego Moccero
Keyword(s):  
Euro Area ◽  
Banking Sector ◽  
Global Financial Crisis ◽  
Decomposition Analysis ◽  
Bank Lending ◽  
Empirical Literature ◽  
Bank Capital ◽  
Macroeconomic Impact ◽  
The Global Financial Crisis ◽  
The Impact

Abstract While the global financial crisis revealed a need for macroprudential policy tools to mitigate the build-up of risk in the financial system, the impact of such policies on the banking sector and the macroeconomy remains largely uncertain. We contribute to the empirical literature that estimates the impact of shocks to bank capital buffers on bank lending and the macroeconomy by estimating a Bayesian VAR model identified with sign restrictions. We use bank-level data for large euro area listed banks to construct an aggregate bank capital buffer for the euro area, which is included as another variable in the model. We estimate three shocks affecting the euro area economy, namely a demand shock, a monetary policy shock and a shock to bank capital buffers. We find that banks curtail lending and reduce their relative exposure to riskier assets in response to a shock to the bank capital buffer. Historical shock decomposition analysis shows that shocks to bank capital buffers have contributed to impair bank lending growth and to widen bank lending spreads, hence depressing economic activity.

scholarly journals Monetary policy and bank lending in euro area since the outset of the global financial crisis

2020 ◽  
pp. 10-10
Author(s):  
Agata Wierzbowska
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Euro Area ◽  
Global Financial Crisis ◽  
Banking System ◽  
Bank Lending ◽  
Liquidity Provision ◽  
The Individual ◽  
The Global Financial Crisis ◽  
The Impact

In this article, we present the impact of the monetary policy stance of the European Central Bank(ECB)since 2007 on bank lending in the euro area and compare the effects of the main measures: interest rate changes, liquidity provision, and asset purchase programmes. We also analyse the channels through which monetary policy might influence the banking system and narrow our focus to the individual countries. The main results indicate stimulating impact of ECB?s policy stance on bank lending that extends its influence mainly through interest rate cuts further supported by the liquidity provision and asset purchase programmes. However, we also find considerable differences across the member states, of ten depending on the state of the banking system and loan demand in the member state. The results support the variety of monetary policy measures introduced by the ECB, as each played its own role in supporting the banking system and encouraging bank lending in the euro area.

Excess euro-area liquidity raises bank lending risks

2019 ◽  
Keyword(s):  
Monetary Policy ◽  
Euro Area ◽  
Commercial Banks ◽  
Bank Lending ◽  
Domestic Demand ◽  
Basel Iii ◽  
Content Type ◽  
Reserve Requirements ◽  
Regulatory Standards ◽  
Excess Liquidity

Significance The ECB stopped purchasing bonds this month after running its asset purchase programme (APP) since March 2015. The APP flooded commercial banks with liquidity in excess of their minimum reserve requirements, which they could use to grant new loans. The ECB achieved its goal of increasing credit to the private sector, raising domestic demand and warding off price deflation, but commercial banks have kept large amounts of excess liquidity. Impacts Euro-area banks' average profitability has improved during the APP scheme, but less accommodating monetary policy may reverse this trend. The high prudential ratios the Basel III regulatory standards require should make euro-area banks more resilient to monetary tightening. The ECB's mopping up may pose difficulties to banks relying on excess liquidity to meet the Basel III coverage liquidity ratio.

Euro-area GDP growth will slow in 2019

2019 ◽  
Keyword(s):  
Monetary Policy ◽  
Euro Area ◽  
Balance Sheet ◽  
Lower Growth ◽  
Content Type ◽  
Large Size ◽  
Area Growth ◽  
Risks Assessment ◽  
European Parliament Elections ◽  
The Impact

Subject Reasons behind the euro-area growth slowdown. Significance In its Winter 2019 interim forecasts, the European Commission downgraded its expectations for euro-area growth to 1.3% and 1.6% for 2019 and 2020, respectively, from 1.9% and 1.7% three months earlier. At its January meeting, the ECB Governing Council foreshadowed lower growth, shifting its risks assessment, saying that downside risks will dominate. Impacts The European Parliament elections could have a destabilising impact on growth in some countries. Monetary policy can do nothing to cushion the impact of lower growth caused by trade conflict. In case of recession, monetary policy stimulus will be constrained by the large size of the ECB balance sheet.

Do foreign banks in India respond to global monetary policy shocks? A SVAR analysis

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ameen Omar Shareef ◽  
K.P. Prabheesh
Keyword(s):  
Monetary Policy ◽  
Bank Lending ◽  
Foreign Bank ◽  
Foreign Banks ◽  
Monetary Policy Shocks ◽  
Content Type ◽  
Indian Economy ◽  
Policy Shocks ◽  
The Impact

Purpose This paper aims to examine the role of foreign banks in transmitting global monetary policy shocks to India. Further, the authors try to explore the international bank lending channel and analyze the impact of global monetary policy on Indian macroeconomic variables. Design/methodology/approach The authors use a structural break unit root test and structural vector autoregression on monthly data from 1998 to 2018. Findings The study finds that the global monetary policy is significantly determining foreign banks’ lending in India; the evidence of a portfolio re-balancing channel in the process of global monetary policy transmission to the Indian economy; the exchange rate is significantly explaining the foreign bank credit dynamism in India; and evidence of international monetary policy spillover to the Indian economy. Originality/value This is the first attempt to analyze the role of foreign banks in the transmission of global monetary policy shocks to India, where the literature availability is limited. The finding of ineffective domestic monetary policy on foreign bank lending opens the need for an in-depth and diversified analysis of the role of foreign banks in the transmission of domestic monetary policy.

scholarly journals US vs. Euro Area

2019 ◽  
Vol 19 (199) ◽  
Author(s):  
Eugenio Cerutti ◽  
Carolina Osorio Buitron
Keyword(s):  
Monetary Policy ◽  
Euro Area ◽  
Negative Impact ◽  
Financial Sector ◽  
Bank Lending ◽  
Real Sector ◽  
Cross Border ◽  
The Us ◽  
The Impact ◽  
Us Monetary Policy

This paper analyzes the drivers of cross-border bank lending to 49 Emerging Markets (EMs) during the period 1990Q1-2014Q4, by assessing the impact of monetary, financial and real sector shocks in both the US and the euro area. The literature has traditionally highlighted the influence of US monetary policy on driving cross-border bank flows, and more recently the importance of both US and Euro Area (EA) financial/banking sectors’ related variables. Our contribution is the simultaneous analysis of the role of these US and EA drivers, as well as their interactions with real sector shocks. We corroborate the negative impact of US monetary policy tightening on cross-border lending to EMs, but we find that EA monetary policy seems to have an impact mostly on Emerging Europe, reflecting the fact that cross-border lending to most other EM regions is dollar denominated. We also find that real sector shocks in both the US and EA trigger an increase in cross-border lending, but less in EA when modeling the financial sector. Finally, for financial sector shocks, such as those associated with a decrease in bank leverage, our results indicate a broad-based overall contraction of cross-border lending if the shock originates in the US, and heterogenous effects across borrowing regions if the shock originates in the EA.

EVALUATION OF MONETARY POLICY IN EMU THROUGH CREDIT CHANNELS INTERCONNECTEDNESS: EVIDENCE USING BLS DATA

2021 ◽  
pp. 1-27
Author(s):  
MICHAIL E. PETSALAKIS ◽  
AHMED M. KHALID ◽  
GAMINI PREMARATNE
Keyword(s):  
Monetary Policy ◽  
Global Financial Crisis ◽  
Debt Crisis ◽  
Balance Sheet ◽  
Principal Component ◽  
Bank Lending ◽  
European Countries ◽  
Policy Transmission ◽  
Credit Channels ◽  
The Impact

Credit channel(s) of the monetary policy transmission has not been debated much in the literature especially in the context of the European monetary union (EMU) and the apparent rising fragmentation of the previously much integrated European banking system. This discussion is even more important in the aftermath of the global financial crisis (GFC) and the decade-long European debt crisis (EDC), a number of European countries have been experiencing. This paper attempts to investigate the interconnectedness of credit channels in policy transmission in the context of EMU using bank lending survey (BLS) data for a sample of eight European countries. One of the main contributions of this paper is to use BLS data for the entire 11 credit channels. We use principal component analysis (PCA) to investigate the impact of monetary policy on the interconnectedness structure of credit channels. PCA is conducted both for EMU across channels and sample countries. EFA-orthogonal vector rotation indicates a core versus periphery interconnectedness pattern. The results suggest that the household balance sheet channel, borrower cash flow channel and interest rate channel are the most divergent channels in EMU.

Real interest rate, income and bank loans: panel evidence from Egypt

2019 ◽  
Vol 12 (2) ◽  
pp. 227-243
Author(s):  
Mohamed Aseel Shokr
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Bank Lending ◽  
Bank Loans ◽  
Bank Lending Channel ◽  
Content Type ◽  
Lending Channel ◽  
Policy Shocks ◽  
Effect Of Monetary Policy ◽  
The Impact

Purpose This paper aims to examine the effectiveness of monetary policy on bank loans in Egypt using generalized method of moments (GMM) model. Also, it investigates the impact of bank level variables, namely, total assets, liquidity, capital and income on bank loans. It develops the equation of loans, which is introduced by Ehrmann et al. (2002) using bank level variables such as income and the interaction between income and interest rate. Design/methodology/approach This paper examines the impact of monetary policy shocks on bank loans in Egypt by applying the GMM technique and panel data from 1996 to 2014. Findings The results reveal that real interest rate has a significant impact on bank loans, which indicates that the bank lending channel is effective in Egypt. Furthermore, the bank level variables, namely, banks’ size, liquidity and income have significant effects on bank loans in Egypt, which sustains the heterogeneous effect of monetary policy on bank loans. Therefore, the Central Bank of Egypt (CBE) can adjust interest rate to influence the bank loans and total demand. Research limitations/implications It does not examine the effect of monetary policy on small and large banks in Egypt. Practical implications The policy implications from this paper indicate that the monetary authority in Egypt should adjust interest rate to stabilize the bank loan supply. By stabilizing the bank loans, the monetary authority is able to stabilize investment, consumption and total demand. Social implications The relevance of bank lending channel indicates that the role of commercial banks is very important in transmitting monetary policy shocks to the real sector. Originality/value It is important for the CBE, banks and people because it shows the effectiveness of bank lending channel and the effect of global financial crisis on the Egyptian economy.

scholarly journals The Sectoral Impact of Monetary Policy Transmission in India: A Panel VAR Approach

2019 ◽  
Vol 5 (1) ◽  
pp. 63-77
Author(s):  
Taniya Ghosh
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Weak Link ◽  
Bank Lending ◽  
Panel Var ◽  
Informal Credit ◽  
Long Run ◽  
Monetary Policy Shock ◽  
The Impact ◽  
Panel Vector Autoregression

A structural panel vector autoregression (VAR) analysis is done to analyze the impact of monetary policy shock on people associated with various occupations. To understand the efficacy of bank lending channel, it is important to capture the differential occupation-wise effect of interest rate. The article finds that due to a monetary policy shock, the impulse responses capture the movement of loans in theoretically expected direction in most cases. The Granger causality tests successfully establish the long-run relationship between loans and interest rate. Also, the empirical results of good-performing states support the direct link between greater financial penetration and higher economic activity. Monetary policy shock significantly affects the lending behavior in all the sectors, except in agriculture and personal loans sector. The weak link of transmission in these sectors is mainly attributed either to lack of access to formal credit or a preference to informal credit sources over banks.

scholarly journals The impact of monetary policy on Islamic bank financing: bank-level evidence from Malaysia

2018 ◽  
Vol 23 (46) ◽  
pp. 306-322 ◽  
Author(s):  
Muhamed Zulkhibri
Keyword(s):  
Monetary Policy ◽  
Financial Markets ◽  
Banking System ◽  
Bank Lending ◽  
Islamic Banks ◽  
Content Type ◽  
Islamic Bank ◽  
Bank Financing ◽  
Significant Difference ◽  
The Impact

Purpose This paper aims to examine the distributional differences of Islamic bank financing responses to financing rate across bank-specific characteristics in dual banking system. The study also aims to provide understanding of how efficiently Islamic banks perform their roles as suppliers of capital for businesses and entrepreneurs. Design/methodology/approach The study uses panel regression methodology covering all Islamic banks in Malaysia. The study estimates the benchmark model for Islamic bank financing with respect to bank characteristics and monetary policy. Findings The evidence suggests that bank-specific characteristics are important in determining Islamic financing behaviour. The Islamic financing behaviour is consistent with conventional lending behaviour that the Islamic bank financing operates depending on the level of bank size, liquidity and capital. There is no significant difference between Islamic bank financing and conventional bank lending behaviour with respect to changes in monetary policy. Originality/value Many problems and challenges relating to Islamic financing instruments, financial markets and regulations must be addressed and resolved. In practice, it would be a good idea if Islamic banks move away from developing debt-based instruments and concentrate more efforts to develop profit and loss sharing instruments.

Sign in / Sign up

Export Citation Format

Share Document