7/2015 Manuel Buchholz. How effective is macroprudential policy during financial downturns? Evidence from caps on banks leverage

Working Papers of Eesti Pank 7/2015

This paper investigates the effect of a macroprudential policy instrument, caps on banks’ leverage, on domestic credit to the private sector since the Global Financial Crisis. Applying a difference-in-differences approach to a panel of 69 advanced and emerging economies over 2002–2014, we show that real credit grew after the crisis at considerably higher rates in countries which had implemented the leverage cap prior to the crisis. This stabilising effect is more pronounced for countries in which banks had a higher pre-crisis capital ratio, which suggests that after the crisis, banks were able to draw on buffers built up prior to the crisis due to the regulation. The results are robust to different choices of subsamples as well as to competing explanations such as standard adjustment to the pre-crisis credit boom.

JEL Codes: E51, E58, G21, G28

DOI: 10.23656/25045520/72015/0011

Keywords: macroprudential policies, domestic credit, financial crisis

Corresponding author's e-mail address: Manuel.Buchholz [at] iwh-halle.de

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The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank, the Eurosystem or the IWH.