Macroprudential Policy and the Probability of a Banking Crisis

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First, macroprudential policy is found to be effective in avoiding banking crises by curbing credit growth. Second, we found that macroprudential policy is more effective in countries with an inflation targeting framework or floating exchange rate regimes or in countries without capital controls. Thus, policymakers need to consider the combination of multiple different macroeconomic policies when formulating macroprudential policies. This message is particularly important in the context of the ongoing policymakers’ efforts to combat the Covid-19 crisis for good and clear public policy communication. To agree on policies in the thick of the crisis, the government can set up a task force of senior officials gathered in a crisis management committee, which includes all governmental agencies in charge of managing the financial crisis (i.e., the monetary authority, ministry of finance, supervisory agencies, ministry of economy, etc.). Policymakers and financial regulatory authorities should be very cautious about learning lessons from other countries’ experiences. This is because the effectiveness of macroprudential policy differs significantly across countries that have different monetary policy frameworks, exchange rate policies, and capital flow measures. In recent years, some countries that have experienced housing booms due to foreign buyers have introduced a ban on the purchase of residential property by foreign residents. In this case, such countries used capital controls as a policy tool to stabilize their housing markets. The results of our research indicate that for countries without capital controls, a certain macroprudential policy such as LTV regulations may be effective in attaining banking stability by containing credit growth.

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