## _061013c ## Source details **Canonical URL:** [_061013c](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_061013c.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_061013c.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_061013c.pdf.json) --- ### Countercyclical Capital Buffer (CCB): purpose, design, and Ireland simulation - Purpose and intended effects: - Increase resilience of the banking sector to negative shocks. - Build capital buffers in periods when systemic risks are rising. - Reduce procyclicality of bank lending by increasing capital during booms and allowing release in downturns. - CCB is a time-varying buffer on top of minimum capital requirements and the conservation buffer; it must be met with common equity Tier 1. - Design guidance and operational parameters: - National discretion: national regulators decide when to implement and release the buffer; buffer add-on decisions may be preannounced by up to 12 months; buffer reduction takes effect immediately. - Reciprocity: internationally active banks face the CCB as a weighted average of the CCBs in countries where they have exposures; add-ons above 2.5 percent are not subject to mandatory reciprocity. - Recommended indicator and filter: credit-to-GDP ratio (credit gap) recommended; BCBS suggests Hodrick-Prescott filter with lamda = 400 000 for quarterly data (one-sided filter recommended). - Threshold mapping (BCBS recommendation): - If gap < lower threshold: CCB = zero. - If gap > upper threshold: CCB = maximum of 2.5 percent of risk-weighted assets. - Suggested thresholds: lower threshold 2 percent and upper threshold 10 percent. - Indicators, complementary information and release-phase considerations: - Credit gap limitations: can be negatively correlated with GDP growth and may lag business cycle, reducing reliability for release decisions. - Complementary indicators recommended: credit growth, GDP growth, property prices, bank profitability variables, current account deficits, housing prices, aggregate banking sector losses, credit spreads, and “near-coincident” indicators of systemic stress. - Release-phase guidance: prompt and sizeable release preferred; dividend distributions should be prohibited even when CCB is fully released. - Judgment, trade-offs, and accountability: - Rapid credit growth can be “good booms”; gap measures have low probabilities of crisis detection and miss many crises. - Trade-offs: lower threshold balancing timely detection vs false alarms; mechanical reliance on credit gap can increase procyclicality. - Accountability: communicate buffer decisions and evaluate performance. - Ireland simulation (methodology and key findings): - Methodology/assumptions: - Credit-to-GDP ratio uses private sector credit and nominal GDP quarterly; private sector credit includes credit to households, non-financial companies, insurance companies, pension funds and other financial intermediaries. - One-sided HP filter used; activation lower threshold 2 percent, upper 10 percent; CCB varies linearly between 0 and 2.5 percent when gap between 2 and 10 percent. - Release indicators: house prices and a principal component of the four biggest banks’ stock prices; exit signal triggers full release. - Reciprocity: majority of domestic banks’ foreign credit exposures to the U.K. (about 90 percent of all foreign credit exposures and about 75 percent of all foreign claims as of June 2012); assumed U.K. credit exposure share 30 percent of overall credit exposure; Bank of England credit gap used for U.K. exposures. - Simulation start date: 1997. - Findings: - Simulated additional buffer would have built up to its maximum three years ahead of the financial crisis under BCBS formula. - A simple calculation based on a 2008 Tier 1 capital calculation shows the additional buffer would have saved up to a quarter of the fiscal costs of the financial crisis for the Irish authorities. - Raising additional capital could have discouraged lending, likely mitigating the housing price boom. - Credit gap performed poorly for release decision during crisis; extreme house price and stock price growth rates (two standard deviation from the mean) signaled release one year before (stock prices) and at the time (house prices) when the crisis hit. - Caveats: illustrative analysis dependent on starting dates and methodological choices; not comprehensive. ### FPC mandate, indicators, and country examples (Switzerland, U.K., others) - FPC indicators and activation: - FPC will identify and publish a list of core indicators of systemic risk and review them regularly to guide CCB use. - Core indicators include: (i) measures of balance sheet stretch within the financial system and borrowers; (ii) measures of terms and conditions in financial markets; (iii) indicators of risks concentrated in particular sectors; (iv) indicators of changing patterns in distribution of risks across institutions, households, corporations. - Likelihood of activation depends on homogeneity of indicator signals; policy decisions and Directions will be published in the quarterly FPC Record and Financial Stability Report. - Switzerland (sector-focused CCB example): - Swiss CCB is time-varying, must be in common equity Tier 1 up to a maximum of 2.5 percent of risk weighted assets in Switzerland. - Timeline: CCB framework introduced July 2012; decision in February 2013 requires banks to comply with an additional capital requirement of one percent of risk weighted direct and indirect mortgage-backed positions secured by residential property by end of September 2013 (seven months after announcement). - Institutional roles: Swiss National Bank proposes level and implementation period under “guided discretion”; Federal Council final decision; FINMA supervises implementation. - Other mentions: - Switzerland has recently deployed the CCB for the first time. - U.K. established a CCB framework with the Financial Policy Committee (FPC) responsible for buffer decisions. - China implemented the CCB in 2010. - New Zealand proposed CCB framework in December 2012; applicable from January 1, 2014. ### Sectoral macroprudential instruments: LTV, DTI, sectoral capital requirements - Aggregate vs sectoral: - Aggregate instruments target system-wide capital/liquidity; sectoral instruments target exposures to particular sectors (consumer loans, corporate exposures, real estate). - Types and targets: - Demand-side tools: limits on loan-to-value (LTV) ratios; caps on debt-to-income (DTI) ratios—primarily affect credit demand. - Supply-side tools: sectoral capital requirements (higher risk weights for specific sector exposures)—reduce credit supply to targeted sectors. - Scope: can target loan types, borrower groups, properties in heated regions, or loans in specific currencies. - Adoption statistics (sample of countries, Total = 46): - Limits on LTV Ratio: 24 (52 percent) - Caps on DTI Ratio: 14 (30 percent) - Limits on LTV and DTI ratios: 14 (30 percent) - Sectoral Capital Requirements: 23 (50 percent) - One tool: 36 (78 percent) - Any two tools: 18 (39 percent) - All three tools: 7 (15 percent) - Use and country examples: - Higher risk weights on mortgage loans with high LTV: Ireland, Norway, Spain, Estonia, Peru, Thailand. - India targeted commercial real estate booms. - Brazil, Turkey, Malaysia raised risk weights on consumer loan segments. - Eastern European countries increased risk weights on foreign currency loans to unhedged borrowers. - Brazil empirical outcome: after December 2010 tightening, annual growth rate of credit to households fell from 22 percent in December 2010 to 11 percent in December 2011; proportion of vehicle loans with maturity higher than 60 months decreased about 20 percentage points. - Implementation challenges and circumvention: - Reduced effectiveness when banks hold capital well above minima. - Circumvention via non-banks, foreign banks/branches, off-balance-sheet activities (examples: Bulgaria, Serbia); foreign-owned banks may switch borrowers to parent entities. - LTV/DTI limits less prone to international leakages if applied to all branches of foreign banks. - Benefits of using multiple sectoral tools: - Reduces circumvention, addresses collateral (LTV) and affordability (DTI), strengthens resilience via sectoral capital requirements. - Trade-offs: multiple instruments may raise costs to households and financial institutions. - Evidence on effectiveness: - Lim and others (2011): credit growth declines after LTV/DTI limits; LTV reduces procyclicality of credit growth by 80 percent. - Ahuja and Nabar (2011): LTV and DTI require four quarters to reduce annual loan growth rates by 3.7 and 2.8 percent respectively. - Igan and Kang (2011): LTV and DTI associated with reduced house price appreciation and transaction activity in Korea. - Crowe and others (2011): 10 percentage point tightening of LTV leads to decline in house price appreciation between 8 and 13 percentage points (U.S. state-level). - Duca and others (2011): 10 percentage point decrease in LTV for first-time buyers associated with 10 percentage point decline in house price appreciation rate. - IMF (2011b): conditional on a housing bust, falls in property prices are less steep where LTV ratios are tight. - Wong and others (2011): for a 1 percent fall in house prices, mortgage default incidence is 1.29 basis points without LTV limit vs 0.35 basis points with limit. - Design trade-offs and tailoring: - Must balance stability benefits with home ownership preferences; examples of tailoring: mortgage insurance programs (Hong Kong SAR, Canada), differentiated LTVs for multiple mortgages (Singapore), tighter limits in speculative zones (Korea). ### Liquidity and funding macroprudential tools: MSL and CFR (Korea, New Zealand) - Motivation: - Banks’ maturity transformation and short-term wholesale funding can amplify credit booms and create maturity/currency mismatches—acute in small open economies. - Two instruments: - Macroprudential Stability Levy (MSL): price-based Pigovian tax on non-core foreign currency liabilities. - Core Funding Ratio (CFR): quantity-based minimum requirement on core funding. - Relative strengths: - If banks differ only in profit-making, MSL is efficient; if risk-shifting incentives differ, CFR is better. - Combining both can control risk-shifting and internalize externalities. - Korea — MSL case: - Background: short-term net external debt rose to US$106 billion in 3Q 2008 from US$12 billion at end-2005. - MSL adopted August 1, 2011; levy on daily average balance of non-deposit foreign currency liabilities up to one year; applies to 19 domestic banks and 38 foreign bank branches. - Levy rate varies from 2 to 20 basis points depending on maturity; exemptions specified. - Proceeds go to Foreign Exchange Stabilization Fund to provide liquidity during stress. - Complementary measures: caps on loan-to-deposits ratio (2012); ceilings on FX derivative positions progressively tightened (June 2010: 50% of capital domestic banks / 250% foreign branches; June 2011: 40% / 200%; December 2012: 30% / 150%). - Outcomes: banks’ short-term net external debt declined from US$65 billion in June 2010 to US$43 billion in June 2012; short-term external debt ratio decreased to 50.7 percent in 2Q 2012 after peaking at 72.6 percent in 3Q 2008. - Caveat: recent implementation; decreases may also reflect demand-side factors. - New Zealand — CFR case: - Background: gross external debt exceeded 130 percent of GDP in 2009; high short-term external debt. - CFR introduced October 2009; effective April 2010. One-year CFR = core funding / total loans and advances. - Core funding includes funding with residual maturity > 1 year, Tier 1 capital, weighted short-term funding instruments. - Minimum CFR timeline: 65 percent (April 2010); 70 percent (July 2011); 75 percent (January 2013; originally scheduled July 2012 but deferred). - By July 2012, system CFR reached 84.9 percent; all banks held at least a five percent buffer above minimum. - Outcomes: increased holdings of liquid assets, increased retail and long-term wholesale funding; short-term external debt declined by about 10 percent of GDP since end-2007. - Expected transmission: stronger CFR during booms forces banks to compete for retail funding or borrow longer-term wholesale, affecting lending margins and limiting excessive credit growth. ### Cross-country empirical findings on macroprudential tools (conclusion excerpts) - Studies and methods: various dynamic panel regressions, VARs, error-correction models, and panel regressions across country samples (examples and authors preserved from source). - Main cross-country findings: - LTV, DTI, risk weights, reserve requirements, and provisioning requirements repeatedly identified as effective in containing credit (to GDP) and house price growth. - LTV caps decelerate property price growth; LTVs and DTIs slow property lending growth. - Composite measures reduce incidence of credit booms and probability booms end badly. - Reserve requirements effective but associated with leakages in some settings. - Changes in minimum capital requirements and non-standard liquidity measures impact housing price inflation. - Tightening LTV caps reduces sensitivity of mortgage default risk to property price shocks and reduces household leverage. - Selected country-level evidence: - Hong Kong: LTV and stamp duties helped slow property price inflation. - Croatia: credit growth ceiling reduced domestic private but not total private credit due to substitution with foreign corporate debt. - South Korea: LTV and DTI reduce house price appreciation and transaction activity. - Spain: dynamic provisioning mitigates credit supply cycles and has positive firm-level credit availability effects. - Canada: LTV, DTI, and amortization period reduce mortgage credit and house price growth. - China: reserve requirement negatively associated with loan growth; house-related policies and reserve requirement effective on house price growth; capital requirement and liquidity ratios ineffective in reported specification. ### Taxation, Financial Transaction Tax (FTT), and asset-price implications - FTT overview and assessment: - Several emerging and advanced economies have forms of FTTs or stamp duties; EU plans for 11 member states to adopt broad-based FTT at start of 2014 (as noted in source). - Assessment: FTTs regarded as inferior to FSC and FAT for addressing core market failures and raising revenue; little evidence FTTs reduce short-term price volatility; cascading effects and avoidance reduce efficiency. - Taxation and asset prices: - Taxes influence asset prices through capitalization of higher future taxes; effects depend on investor tax status, supply/demand responses, and transaction frequency. - Mixed empirical evidence: U.S. historical negative correlation between asset prices and tax burden on equity; Swiss study finds no effect of transaction or capital gains taxes on housing dynamics; ECB noted minor impact of transaction taxes on bubbles. - Housing tax incentives (light/no taxation of imputed rent, generous mortgage interest relief) can encourage borrowing against housing and shift capital into housing, increasing vulnerability. - Policy implications: - Using tax policy purposively to affect asset prices is problematic due to timing, credibility, and side effects; focus on neutrality across assets and income forms; macroprudential authorities should flag tax non-neutralities that impair financial stability. ### Competition policy, TBTF, and structural measures - Role of competition policy: - Competition affects bank risk-taking; theoretical and empirical evidence suggests an inverse U-shaped relationship between competition and stability—intermediate competition optimal. - Competition policy should incorporate macroprudential objectives; cooperation between competition authority and prudential regulator recommended. - TBTF approaches: - Quantity-based approach: use competition policy tools to restrict bank size (limit mergers, force spin-offs). Challenges exist but can focus on sub-segments where size harms competition. - Price-based approach: correct TBTF funding advantage (empirical funding advantage cited up to 80 basis points a year) via taxes or fines increasing with bank size to level playing field and reduce incentives to grow. - Structural policies: - Restrict risky market-based activities (proprietary trading, securitization) to raise charter value and stability (examples: Volcker Rule, Vickers, Liikanen proposals). - Require non-banks to face similar prudential standards to avoid regulatory arbitrage and excessive non-bank competition in lending. - Address excess competition for retail deposits and implicit guarantees that distort funding mixes. - Crisis management interaction: - Competition policy favors limited government involvement; crisis management may require exceptional government action (temporary higher concentration or government control) to enable effective resolution. - Lessons and conclusions: - Competition policy should include financial stability objectives; may need distinct rules for banks vs non-financial firms; transferring some bank competition responsibilities to prudential regulator may be warranted. - Competition policy can help address TBTF and structural sources of instability and facilitate crisis resolution when needed. ### Country case studies and examples - Ireland — competition and crisis: - Euro membership increased foreign institution expansion and cheap foreign funding; competition pressured domestic banks to lower standards and pursue aggressive products (tracker mortgages, 100 percent LTV). - Market structure: foreign banks increased from 80 percent of banks in 1999 to 90 percent in 2009; by end-2012 total credit institutions 73, foreign-owned 56. - Funding composition: retail deposits grew from €44 billion to €150 billion; retail funding declined to 8 percent of total liabilities pre-crisis; non-core liabilities (non-Irish resident deposits) rose from €79 billion in 2003 to €271 billion in 2008. - Indicators: net interest margins and Z-scores fell sharply from 2003 as vulnerabilities built. - Israel — taming housing booms: - BOI policy rate cut from 4.25 percent (September 2008) to 0.5 percent (April 2009); real house prices surged 38 percent between 2008Q4 and 2011Q1. - BOI macroprudential actions (selected, preserved exact values/dates): - August 2009: requested banks tighten risk management and disclosure for floating-rate mortgage loans. - July 2010: supplementary reserve requirement of 0.75 percent for outstanding mortgages with LTV > 60 percent. - October 2010: capital charge of 100 percent (instead of 35 percent) on loans over NIS 800,000 with floating-rate component > 25 percent of principal and LTV > 60 percent. - May 2011: adjustable-rate component limited to no more than one-third of principal for mortgage loans with notification requirements. - 2012–2013 measures: - July 2012: 100 percent capital charge on borrower groups buying residential project properties engaging third parties for construction. - November 2012: LTV limit 70 percent for housing loans excluding first-time buyers (first-time buyers max LTV 75 percent); investment mortgages LTV capped at 50 percent. - February 2013 proposals: increased capital requirements (graduated risk weights by LTV) and higher provisioning for housing loans. - Policy challenges: tension between price stability and financial stability when objectives point in opposing directions; the BOI communicated decisions and assigned responsibilities to Monetary Committee (interest rates) and Supervisor of Banks (LTV). - Social sensitivity: housing measures provoked public protests and press criticism when access to mortgages tightened. ### Design, implementation and circumvention considerations (cross-cutting) - Regulatory perimeter and circumvention: - Effectiveness of LTV/DTI and other tools reduced by circumvention; widening regulatory perimeter (include non-banks, foreign affiliates, apply to new lending flows) reduces leakages. - Timing, indicators and judgment: - Use of multiple indicators and judgment recommended; prompt and sizeable buffer releases, communication, and accountability emphasized. - Calibration caveats: - Simulations and empirical results sensitive to starting dates, methodological choices, and country-specific factors; illustrative exercises not definitive. *Source: 1. Ireland: Simulated Countercyclical Capital Buffer (page 12); KEY ASPECTS OF MACROPRUDENTIAL POLICY—BACKGROUND PAPER, INTERNATIONAL MONETARY FUND.* ### 1. Ireland: Simulated Countercyclical Capital Buffer ________________________________ 12 ### 1. Ireland: Simulated Countercyclical Capital Buffer ________________________________ 12 ### Purpose and intended effects of the Countercyclical Capital Buffer (CCB) - The CCB was proposed by the Basel committee to increase the resilience of the banking sector to negative shocks. - Objectives: - Build capital buffers in periods when systemic risks are rising to enhance the ability of banks to withstand losses. - Reduce the procyclicality of bank lending by increasing capital during booms and allowing release in downturns. - The CCB is a time-varying buffer on top of minimum capital requirements and the conservation buffer; it must be met with common equity Tier 1 (other fully loss absorbing capital is still under consideration). ### Design guidance and operational parameters - National discretion: - The exact shape of the CCB framework will be at national discretion; national regulators decide when to implement and release the buffer. - Buffer add-on decisions would be preannounced by up to 12 months before they take effect. - Buffer reduction would take effect immediately. - Reciprocity: - International reciprocity is a cornerstone: internationally active banks will face the CCB as a weighted average of the CCBs in countries where they have exposures. - Jurisdictional reciprocity aims to preclude incentives to circumvent the CCB. - Recommended indicator and filter: - The credit-to-GDP ratio (the credit gap) is recommended as a useful common reference point. - To estimate the trend, the BCBS suggests using the Hodrick-Prescott filter with a smoothing parameter lamda equal to 400 000 instead of 1600 for quarterly data (one-sided filter recommended to address end-point problems). - Translating the credit gap into buffer activation: - BCBS recommends threshold values to map the gap to the CCB: - If gap < lower threshold: CCB = zero. - If gap > upper threshold: CCB = maximum of 2.5 percent of risk-weighted assets. - Between thresholds: CCB varies with extent of systemic risk build-up. - Suggested thresholds: lower threshold 2 percent and upper threshold 10 percent (performance shown to be reasonably robust across jurisdictions, though dependent on smoothing parameter). - Jurisdictions can impose CCB higher than 2.5 percent, but reciprocity will not apply to additional amounts. ### Indicators, complementary information and release-phase considerations - The credit gap is a recommended starting point but has limitations: - Credit gap can be negatively correlated with GDP growth, potentially increasing procyclicality by signalling excessive credit growth during low GDP growth. - Credit gap may not be a reliable indicator for buffer release because credit lags the business cycle. - Complementary indicators and combined signals: - Authorities should use additional indicators such as credit growth, GDP growth, property prices, bank profitability variables, current account deficits, housing prices, aggregate banking sector losses, credit spreads, and “near-coincident” indicators of systemic stress. - Combined information from multiple indicators generally provides a better signal than relying on a single indicator. - Release-phase guidance: - Prompt and sizeable release of the buffer is preferable to gradual release. - Measures of aggregate banking sector losses and high-frequency market-based indicators (e.g., credit spreads) are appropriate signals for release. - Dividend distributions should be prohibited even when the CCB is fully released to ensure released capital is used to absorb losses. ### Judgment, trade-offs, and accountability - Judgment is necessary in setting the buffer because: - Rapid credit growth does not always imply problematic exuberance; some booms are “good booms” financed by stable funding and expand productive capacity. - Out-of-sample analyses show credit growth and gap measures produce low (but increasing) probabilities of crisis and miss many crises. - Trade-offs: - The lower threshold should balance timely detection of systemic risks against false alarms and over-regulation. - Relying mechanically on the credit gap could increase procyclicality by responding to GDP falls. - Accountability: - Judgment should be accompanied by communication of buffer decisions and evaluation of buffer performance to promote accountability and reduce uncertainty for banks. ### Implementation experience and country examples - Limited real-world experience with dynamic capital regimes; empirical studies of actual CCB operation are scarce. - Noted country experiences: - Switzerland has recently deployed the CCB for the first time. - The United Kingdom (U.K.) has established a CCB framework with the Financial Policy Committee (FPC) responsible for buffer decisions. - The FPC would raise the CCB when threats to financial stability emerge and reduce it when threats recede (reductions take effect immediately). - The buffer would apply to all U.K. incorporated banks, building societies and large investment firms (broker dealers). - The FPC would monitor “leakages” to non-regulated sectors and could recommend expanding the set of institutions to which the CCB applies. - Other mentions: - China implemented the CCB in 2010. - New Zealand proposed a CCB framework in December 2012; the CCB can be applied in times of excessive credit growth from January 1, 2014. - Modeling and simulation evidence (selected findings from literature summarized in the source): - DSGE and other model-based studies find that combinations of mild CCB and macro policies (e.g., monetary policy leaning against the wind) can be effective in crisis prevention. - Simulation exercises suggest the CCB helps reduce credit growth during booms and attenuate credit contractions once released. - Empirical studies indicate that increasing capital requirements in general may reduce credit supply. *Source: 1. Ireland: Simulated Countercyclical Capital Buffer (page 12).* ### 13. The FPC will identify and publish a list of core indicators of systemic risk. While the FPC ### The FPC will identify and publish a list of core indicators of systemic risk ### FPC mandate on indicators and CCB activation - The FPC will identify and publish a list of core indicators of systemic risk and review them regularly to provide guidance about the use of the CCB. - Judgment will play an important role in all FPC decisions given the complexity and evolving nature of the financial system. - The choice of indicators will evolve over time as the FPC learns from experience and as new research is undertaken. - The core indicators set will include: - (i) measures of balance sheet stretch within the financial system and borrowers; - (ii) measures of terms and conditions in financial markets; - (iii) indicators of risks concentrated in particular sectors; and - (iv) indicators of changing patterns in the distribution of risks across financial institutions, households, and corporations. - The likelihood of activation of the CCB will depend on whether the indicators convey a homogenous picture of systemic risk. - The policy decision and Directions issued to the PRA or the FCA will be published in the quarterly FPC Record; explanations of background, benefits and costs will be published in the Financial Stability Report. - Both changes of indicators and their absolute level will be analyzed. ### Example 2 — Switzerland: design and governance of a sector-focused CCB - Switzerland activated a CCB focused on the residential mortgage market. - The Swiss CCB: - is a time-varying capital requirement that can be implemented on a broad basis or targeted at specific credit market segments; - must be in the form of common equity Tier 1 capital amounting to a maximum of 2.5 percent of the risk weighted assets in Switzerland. - Timeline and calibration in Switzerland: - Early introduction of the CCB framework in July 2012 due to concerns about imbalances in mortgage and real estate markets. - Decision to activate the CCB in February 2013 requires banks to comply with an additional capital requirement of one percent of risk weighted direct and indirect mortgage-backed positions secured by residential property by end of September 2013 (seven months following the announcement). - Expected effects: the CCB should dampen mortgage lending (and as a consequence house prices) while building banking sector resilience against a correction of imbalances in mortgage and real estate markets. - Institutional roles: - The Swiss National Bank conducts regular assessments of mortgage and real estate markets under an approach of “guided discretion,” proposes the level and implementation period of the CCB, and consults with FINMA before issuing a proposal to the Federal Council. - The Federal Council takes the final decision. - FINMA supervises implementation of the CCB at the individual bank level (the FINMA cannot block any decision regarding the CCB). - Decision inputs and implementation timing: - The central bank’s decision heavily draws on indicators of domestic mortgage volumes and domestic real estate prices; if indicators suggest heterogeneous conclusions, more discretion is used. - The level of the CCB and the implementation period (which will vary between three and 12 months) reflect the degree of imbalances. - Higher-frequency information and judgment play an important role in decisions to deactivate the buffer. ### Example 3 — Hypothetical CCB paths for Ireland (methodology and findings) - Methodology and assumptions: - Credit-to-GDP ratio is calculated as the ratio of private sector credit and nominal GDP on a quarterly frequency. Private sector credit includes credit to households, non-financial companies, insurance companies, pension funds and other financial intermediaries. The broadest measure including domestic, international, bank-originated and market based sources is not used because data prior to 2002 are not publicly available. - A one-sided HP filter is used to extract the trend and calculate the credit gap. - Activation rule: the CCB is assumed to be activated for exposures to counterparties in Ireland when the credit gap breaches the lower threshold set to 2 percent; the upper threshold is set at 10 percent and the CCB increases linearly between zero and 2.5 percent with the value of the credit gap between 2 and 10 percent. - Release rule: house prices and a principal component of the four biggest banks’ stock prices are used as two indicators for the release of the CCB; once an exit signal is received the CCB is fully released. Long time series for credit default swaps for Irish banks do not exist. - International exposures and reciprocity: the CCB for banks in Ireland is calculated as a weighted average of the buffers applied in the jurisdictions to which Irish banks have exposures. Assumptions used for illustration: - The majority of domestic banks’ foreign credit exposures are to the U.K. (about 90 percent of all foreign credit exposures and about 75 percent of all foreign claims as of June 2012). For simplicity it is assumed that these shares did not change during the last 10 years. - The share of the U.K. credit exposure in overall credit exposure is assumed to be 30 percent to reflect the geographical distribution of domestic banks’ credit exposure as of June 2012. - The Bank of England credit gap is used to calculate the CCB for U.K. exposures. - Simulation start date: 1997 is used as the starting date for credit gap calculation; simulation results depend on starting dates and can change substantially with different starting dates. - Findings: - Figure 1 (simulated) shows that the additional buffer would have built up to its maximum three years ahead of the financial crisis under the BCBS formula, suggesting the credit gap measure is a good indicator for activation of the CCB. - A simple calculation based on a 2008 Tier 1 capital calculation shows that the additional buffer would have saved up to a quarter of the fiscal costs of the financial crisis for the Irish authorities. - Raising additional capital could have been difficult for some banks, which would have discouraged lending and likely lessened the supply of loans, potentially mitigating the housing price boom. - While the credit gap performed poorly for the release decision (the credit-to-GDP ratio remained above trend during the crisis because GDP contracted severely while credit growth lagged), extreme house price and stock price growth rates (two standard deviation from the mean) signaled the release of the CCB a year before (stock prices) and at the time (house prices) when the crisis hit Ireland even as the credit gap continued to rise. - Caveats: - The analysis is illustrative, not comprehensive; a more exhaustive analysis of the sources and magnitudes of losses would be necessary to draw firm conclusions. - Simulations depend on assumed starting dates and other methodological choices. ### Example 4 — Hypothetical CCB paths for Spain (methodology and findings) - Methodology and assumptions: - The CCB for banks in Spain is calculated as a weighted average of the buffers applied in the jurisdictions to which Spanish banks have exposures. Assumed exposures (as of March 2012): U.K. (43 percent), United States (22 percent), Brazil (19 percent) and Mexico (15 percent); about 65 percent of banks’ foreign exposures correspond to those countries. The share of foreign exposure in overall banks’ exposure is assumed to be 45 percent. - Credit measures used for credit-to-GDP ratio: Spain — the overall debt of nonfinancial firms and household; Brazil — credit to the private sector; Mexico — credit to private and public sector; U.S. — the overall debt of nonfinancial firms and household; U.K. — Bank of England credit gap. - Release indicators: nonsubsidized house price and a principal component of the four largest banks’ stock prices; spreads on the government bond (difference in yields on Spanish and German 10 year government bond) are used as a high-frequency indicator for illustration. - Findings: - Figure 5 (simulated) shows the additional buffer would have built up three years ahead of the financial crisis. - The additional capital of 2 percent prior to the crisis would have saved almost all fiscal costs of the financial crisis for the Spanish authorities. - The additional capital is about 70 percent larger than the estimated €24 billion in dynamic loan-loss provisioning. - While the credit gap might be a good indicator for both activating and releasing the CCB in Spain, authorities are expected to look at many other indicators before releasing the buffer. Figures 6-9 indicate extreme (two standard deviation from the mean) house price, stock price and spread growth rates are useful indicators for the release of the CCB; all three indicators signal an exit decision before or at the time the crisis hit Spain. - Caveats and calibration notes: - Crisis dating follows Laeven and Valencia (2012); for Spain the last quarter of 2008 is taken as the start of the banking crisis when government measures were taken. According to Laeven and Valencia (2012) the Spanish banking crisis that began in 2008 became systemic in 2011. - According to Laeven and Valencia (2012) the fiscal costs related to restructuring of the Spanish financial sector have amounted to 3.8 percent of GDP since 2008; the calculation compares annualized GDP in 2008 q3 to the value of additional capital, assuming losses are spread evenly across all financial institutions. ### Box — Reciprocity principle under BCBS and an illustrative calculation - Reciprocity principle: each jurisdiction determines the CCB for credit exposures to counterparties in its country; for internationally active banks the home supervisor ensures the CCB is calculated on a consolidated basis according to the geographic location of exposures, i.e., the CCB is a weighted average of the CCBs applied in jurisdictions to which the bank has exposure. - The home supervisor cannot impose a buffer requirement for credit exposures to a foreign country that is below the requirement set by the host supervisor. - The mandatory reciprocity principle does not apply to buffer amounts above 2.5 percent; reciprocity with respect to add-on buffers higher than 2.5 percent would be voluntary. - Numerical illustration (as provided): - Assume Country 1 sets CCB at 2.5 percent and Country 2 at 1 percent. Each country has two banks: one with domestic exposures only and one with exposures to the other country. In Country 1, Bank 1B has 40 percent of credit exposures to Country 2; in Country 2, Bank 2B has 70 percent cross-border exposures. Under reciprocity, loans to Country 1 counterparties attract 2.5 percent regardless of the lender’s location. The CCB for Bank 1B would be calculated as: 0.6*2.5 percent + 0.4*1 percent = 1.9 percent. - Similar reciprocity exists in the Recommendation of the European Systemic Risk Board on lending in foreign currencies in the European Union for foreign currency lending to borrowers domiciled in host jurisdictions. ### Mentioned macroprudential tools for limiting sectoral imbalances - Heading introduced: "To Limit Sectoral Imbalances: Limits on Loan-To-Value (LTV) Ratio, Caps on Debt-To-Income (DTI) Ratio, and Sectoral Capital Requirements" (section marker B). *Source: KEY ASPECTS OF MACROPRUDENTIAL POLICY—BACKGROUND PAPER, INTERNATIONAL MONETARY FUND.* ### 24. Instruments to address procyclical systemic risk can be chosen and calibrated with ### _061013c - 24. Instruments to address procyclical systemic risk can be chosen and calibrated with ### Aggregate vs. sectoral macroprudential instruments - Aggregate instruments: calibrated to ensure the financial system as a whole holds proper amounts of capital or liquidity from a macroprudential perspective. - Sectoral instruments: concentrate on relative risks from exposures to a particular sector (e.g., consumer loans, corporate exposures, real estate). Appropriate when risk is building up in a particular sector (Committee on the Global Financial System (CGFS), 2012). ### Types and targets of sectoral instruments - Demand-side tools: - Limits on LTV ratios: cap mortgage loan size relative to property value, impose a minimum down payment. - Caps on DTI ratios: restrict mortgage loan size to a fixed multiple of household incomes. - Both primarily affect credit demand. - Supply-side tools: - Sectoral capital requirements: higher risk weights/capital held against loans to specific sectors, increasing banks’ costs of exposure and reducing supply of credit to the sector. - Scope: can target specific loan types, borrower groups, properties in heated regions, or loans denominated in a specific currency. Can be applied individually or in tandem. ### Adoption statistics (Sectoral tools — sample of countries) - Table 1 — Number of Countries (Total = 46): - Limits on LTV Ratio: 24 (52 percent) - Caps on DTI Ratio: 14 (30 percent) - Limits on LTV and DTI ratios: 14 (30 percent) - Sectoral Capital Requirements: 23 (50 percent) - One tool: 36 (78 percent) - Any two tools: 18 (39 percent) - All three tools: 7 (15 percent) ### Use of sectoral capital requirements — examples and targeted loan types - Common targets: unsecured consumer loans, foreign currency loans to unhedged borrowers, residential and commercial real estate mortgage loans. - Country examples: - Increased capital adequacy risk weights on mortgage loans with high LTV ratios: Ireland, Norway, Spain, Estonia, Peru, Thailand, among others. - India: also targeted commercial real estate booms. - Brazil, Turkey, Malaysia: raised risk weights on segments of consumer loans (penalizing unsecured loans or car loans with high LTV ratios). - Several Eastern European countries: higher risk weights on foreign currency or foreign-currency indexed loans to unhedged borrowers. - Empirical outcome in Brazil: after December 2010 tightening, annual growth rate of credit granted to households decreased from 22 percent in December 2010 to 11 percent in December 2011; proportion of vehicle loans with maturity higher than 60 months decreased about 20 percentage points. ### Implementation challenges and circumvention risks - Reduced effectiveness when banks hold capital well above regulatory minimums—especially during real estate booms. - Circumvention avenues: - Recourse to non-banks, foreign banks and their branches, off-balance-sheet activities outside the regulatory perimeter (examples: Bulgaria, Serbia). - Foreign-owned banks switching borrowers from local affiliate to parent bank. - LTV/DTI limits can also be circumvented via alternative mortgage sources but may be less prone to international leakages because they can be applied to all branches of foreign banks as well as domestic banks. ### Benefits of using multiple sectoral tools - Advantages: - Tackles systemic risk from multiple angles, reducing scope for circumvention. - LTV and DTI complement each other: LTV addresses wealth/collateral; DTI addresses affordability. DTI also limits the use of non-collateralized loans to meet LTV down payment requirements. - Sectoral capital requirements reduce banks’ risky mortgage exposure and increase resilience. - Trade-offs: - Multiple instruments may impose higher costs on households and financial institutions; important to choose effective combinations that minimize unnecessary burdens. ### Real estate boom-bust focus and policy objectives - Policy aims: - Prevent real estate booms and associated leverage buildup in household, corporate, and banking sectors. - Increase financial system resilience to real estate busts. - Emphasis: target increased leverage rather than price increases per se. ### Evidence on limits on LTV and DTI ratios — effectiveness and empirical findings - Adoption: nine Advanced Economies (AEs) and fifteen Emerging Market Economies (EMEs) implemented caps on LTV ratios; six AEs and eight EMEs adopted limits on DTI ratios. Table 3 totals: - Limits on LTV ratio: 24 - Caps on DTI ratio: 14 - Taxes (Stamp duty, capital gains tax, etc): 7 - Empirical findings: - Lim and others (2011): - Credit growth declines after limits on LTV and DTI ratios are introduced; the negative relationship is statistically significant. - The LTV measure reduces the procyclicality of credit growth by 80 percent. - Ahuja and Nabar (2011): - Caps on LTV and DTI decelerate mortgage loans. - Both LTV and DTI require four quarters to reduce annual loan growth rates by 3.7 and 2.8 percent respectively. - Igan and Kang (2011): - Limits on LTV and DTI are associated with reduced house price appreciation and transaction activity. - LTV caps curb speculative incentives; transaction activity in Korea drops significantly in the three-month period following tightening; house price appreciation slows in a six-month window. - Expected house price increases fall after tightening LTV measures—more so among speculative pre-owners than non-owners. - Crowe and others (2011): - Using U.S. state-level data, a 10 percentage point tightening of the LTV ratio leads to a decline in the rate of house price appreciation of between 8 and 13 percentage points. - Duca and others (2011): - A 10 percentage point decrease in LTV ratio for first-time buyers is associated with a 10 percentage point decline in the house price appreciation rate. ### Evidence on resilience and downturn mitigation - IMF (2011b): across OECD countries over the 1980 to 2010 period, conditional on a housing bust occurring, the fall in property prices is less steep where LTV ratios are tight. - Financial Services Authority (2009): correlation between higher LTV ratios and higher default rates during 2008 in the U.K. - Korea: housing prices fell from 2008, yet the delinquency ratio on household loans remained below 1 percent even until September 2012—suggesting strict LTV and DTI limits helped prevent household defaults and reduced financial institutions’ credit risks. - Wong and others (2011): for a given fall in house prices (1 percent), the incidence of mortgage default is higher for countries without an LTV ratio limit (1.29 basis points) than for countries with such a tool (0.35 basis points); lender losses for a given fall in house prices are also lower where LTV limits exist. *Source: IMF staff—Key Aspects of Macroprudential Policy (section 24).* ### 35. In tandem with limits on LTV and DTI ratios, countries have sometimes been using ### 35–51: In tandem with limits on LTV and DTI ratios, countries have sometimes been using ### Fiscal and structural instruments addressing real estate imbalances - Fiscal (stamp duties) and structural (supply-side) instruments are used when pressures are localized, purchases are financed directly from abroad (without domestic financial sector intermediation), or price growth reflects more fundamental imbalances. - Stamp duty objective: discourage short-term speculative purchases and reduce demand from non-resident buyers outside LTV/DTI regulatory perimeter. ### Stamp duty—Singapore example - December 2011: additional buyer’s stamp duty imposed on top of existing 3 percent buyer’s stamp duty: - 10 percent for foreigners and corporate entities - 3 percent for permanent residents buying the second or subsequent property - 3 percent for Singapore citizens buying their third or subsequent property - Effect: IMF (2012b) shows the stamp duty was effective at reducing demand from foreigners and stabilizing housing prices, evidenced by a sharp drop in foreign buyers’ share of private residential properties in the first quarter of 2012. - Seller’s stamp duty (background note): - Introduced February 2010 on private residential properties sold within one year: 1 percent for the first S$180,000, 2 percent for the next S$180,000, and 3 percent for the remaining balance. - Extended to sales within three years in August 2010, then four years with rates increased to 16, 12, 8, and 4 percent correspondingly in January 2011. - Hong Kong SAR example (special stamp duty): - November 2010: special stamp duty on properties resold within 24 months in addition to existing 4.25 percent duty. - Duty rate: 15 percent for properties resold within six months, declining in steps to zero after 24 months—to discourage “flipping.” ### Supply-side measures - Places with elastic housing supply have fewer and shorter bubbles with smaller price increases (Glaeser, Gyourko, and Saiz, 2008). - Supply-side measures operate at greater lag and are not easily reversed; if housing supply–demand mismatches persist, demand-side instruments’ effectiveness is limited. - Craig and Hua (2011): land supply is the second most important factor driving long run residential property price movements in Hong Kong SAR, following real GDP per capita. ### Circumvention and regulatory perimeter - Effectiveness of LTV/DTI can be reduced by circumvention by market participants. - To minimize circumvention, widen the regulatory perimeter: - Include any financial institution engaged in mortgage lending: banks, non-bank lenders, foreign banks’ affiliates. - Apply instruments to all types of mortgages. - Preferably apply to the flow of new lending rather than the stock of existing mortgages to avoid forcing high-LTV/high-DTI borrowers to provide more collateral after price or income declines. ### Design trade-offs and country-tailored measures for LTV/DTI - Limits must balance financial stability benefits with societal preferences for home ownership. - Country examples of tailored measures: - Hong Kong SAR and Canada: introduced mortgage insurance programs (1999 and 1954 respectively) complementing LTV caps to ensure first-time buyers’ access while addressing systemic risks (Genworth Financial, 2012). - Singapore: lowered the LTV ratio for those with more than one outstanding mortgage loan to target speculators without affecting first-time buyers. - Korea: tighter limits for mortgage loans on properties in officially designated ‘speculative zones’ with high appraised value to focus tightening on speculators rather than young first-time buyers with low income (Igan and Kang, 2011; Lee, 2012). ### To limit systemic liquidity risk: Macroprudential Stability Levy (MSL) and Core Funding Ratio (CFR) - Motivation: - Banks’ maturity transformation and funding via short-term wholesale funding can amplify credit booms and create maturity and currency mismatches—especially in small open economies (SOE). - Excessive reliance on short-term, often foreign currency, wholesale funding contributes to capital inflow surges and sudden stops, possibly resulting in twin banking and currency crises (IMF, 2011c). - Two macroprudential liquidity-type instruments: - Price-based Pigovian tax on non-core foreign currency liabilities (Macroprudential Stability Levy, MSL). - Quantity-based minimum requirement on core funding (Core Funding Ratio, CFR). - Relative strengths (Perotti and Suarez (2011) summary): - If banks differ only in profit-making capacity, price-based tool (MSL) is efficient. - If banks differ in risk-shifting incentives, quantity-based tool (CFR) is best. - If authorities can use capital-type instruments (e.g., countercyclical capital buffer) to address risk-shifting, price-based tool is superior because (i) quantity-based entails deadweight loss and (ii) price-based is easier to adjust. - Combining both tools may be adequate to control risk-shifting incentives and internalize negative externalities and systemic risk. ### Liquidity instruments’ objectives and channels - A levy on non-core liabilities or minimum required core funding ratio can: - Curb maturity and currency mismatch - Curb overall credit growth by reducing reliance on non-core liabilities - Reduce domestic and cross-border cross-exposures among financial institutions (non-core funding often raised in wholesale markets) - Lower likelihood of fire-sales during stress and limit amplification of shocks - Core-funding ratio can serve as a good indicator of credit cycles. ### Korea: Macroprudential Stability Levy case - Background: - Banks rapidly increased short-term non-core FX borrowing from 2005, creating sizable FX mismatches. - Aggregate short-term net external debt of Korean banks rose to US$106 billion in the third quarter of 2008 from US$12 billion at end-2005. - Rollover ratio of short-term external debt fell from 99.8 percent in September 2008 to 39.9 percent in October 2008 (Lee, 2012). - MSL implementation: - Adopted as of August 1, 2011. - Levy imposed in proportion to each bank’s marginal contribution to systemic risk: on banks’ daily average balance of non-deposit foreign currency liabilities of maturity up to a year. - Currently, 19 domestic banks and 38 foreign banks’ branches are subject to the levy. - Levy rate varies from 2 to 20 basis points, depending on the maturity of the debt instrument, and can be adjusted discretionally. - Exemptions: payable spot exchange in foreign currency, derivative instrument liabilities in foreign currency, accounts dealing with liabilities for government policy objectives, and foreign currency deposits (to avoid double burden with deposit insurance). - Proceeds accumulated as part of the Foreign Exchange Stabilization Fund to provide liquidity during stress, complementing deposit insurance. - The levy can be expanded to non-banks if necessary without revising the law. - Complementary measures: - Caps on loan-to-deposits ratio (2012) to shift funding away from wholesale funding. - Ceilings on banks’ FX derivative positions: limits set and progressively tightened: - June 2010: net FX derivative positions limited to 50 percent of capital for domestic banks and 250 percent for foreign banks’ branches. - June 2011: limits lowered to 40 percent and 200 percent. - December 2012: limits cut to 30 percent and 150 percent. - Outcomes and indicators: - Banks’ short-term net external debt (including foreign banks’ branches) declined from US$65 billion in June 2010 to US$43 billion in June 2012. - Short-term external debt ratio decreased to 50.7 percent in the second quarter of 2012 after peaking at 72.6 percent of total bank external debt in the third quarter of 2008. - Sensitivity of capital inflows to global conditions decreased following the levy (Bruno and Shin, 2012). - Rollover risks diminished as residual maturities of external debt increased (IMF, 2012c). - Sensitivity of exchange rate volatility to changes in the VIX declined substantially since the financial crisis (Ree and others, 2012). - Caveats: - Since measures were implemented recently, firm conclusions need more data. - Decrease in short-term external debt may also reflect demand-side factors (e.g., cyclical bust in the shipping industry). ### New Zealand: Core Funding Ratio case - Background: - Banks depended on short-term cross-border funding due to low national saving. - Gross external debt exceeded 130 percent of GDP in 2009. - Short-term external debt remained high at almost 60 percent of GDP at end-2009. - Banks had difficulty rolling over short-term debt after Lehman’s collapse; RBNZ and government intervened with liquidity measures and funding guarantees. - CFR implementation: - October 2009: RBNZ introduced quantity-based measures; effective from April 2010. - One-year CFR defined: core funding divided by total loans and advances. - Core funding defined as: all funding with residual maturity longer than one year, plus Tier 1 capital and a weighted sum of certain short-term funding instruments. - Initial minimum CFR (April 2010): 65 percent of total loans and advances. - Increased to 70 percent from July 2011. - Increased to 75 percent from January 2013 (note: originally scheduled to increase to 75 percent in July 2012 but deferred six months in November 2011). - The RBNZ also introduced one-week and one-month mismatch ratios alongside the CFR. - Outcomes and indicators: - Since 2008, New Zealand banks almost doubled holdings of liquid assets and increased retail and long-term wholesale funding. - Since end-2007, New Zealand’s short-term external debt declined by about 10 percent of GDP, while short-term external debt in percent of GDP rose for many other countries, with notable exceptions Korea and U.K.. - By July 2012 (after improvements in funding markets), banks boosted CFRs to well over 75 percent, with system CFR of 84.9 percent; all banks held at least a five percent buffer above minimum (RBNZ, 2013). Much of CFR increase due to retail deposit growth. - Expected transmission: - The CFR is expected to be stronger during booms: banks must compete for more retail funding (affecting lending margins) or borrow longer-term wholesale funding. - During rapid credit expansion, banks will have less ability to expand domestic credit; lending rates should move higher, reducing excessive credit growth. - Potential benefit: RBNZ may not need to raise its policy rate during credit upswings to the same extent as without the CFR. *Source: KEY ASPECTS OF MACROPRUDENTIAL POLICY—BACKGROUND PAPER (excerpts).* ### Conclusion ### Conclusion ### Cross-country analysis — empirical findings on macroprudential tools - Studies and methodologies: - Arregui et al (2013): Dynamic panel regression on 38 countries based on Krznar et al (2013) data (2000-2011) (see Table X). - Ahuja and Nabar (2011): Dynamic panel regression on the 2010 IMF Survey data (2000-2010). - Almeida, Campello, Liu (2005): Panel regression on a sample of 26 countries over the 1970–1999 period. - Dell'Ariccia et al (2012): Panel regression with a composite measure of six instruments. - IMF (2012), Board paper: Dynamic panel regression on 38 countries based on Krznar et al (2013) data (2000-2011) (see Table X). - Kuttner and Shim (2012): Panel regressions on a sample of 57 countries (1980-2010). - Lim et al (2011): Dynamic panel regression on the 2010 IMF Survey data (2000-2010). - Tovar et al. (2012): Dynamic panel data vector autoregression on 5 Latin American countries (Brazil, Chile, Colombia, Mexico and Peru) during 2003–11; macroprudential measures captured through a cumulative dummy. - Vandenbussche et al (2012): Error correction model on 16 Central, Eastern and Southeastern Europe from the late 1990’s or early-2000’s to end-2010. - Wong et al (2011): Panel regression data from 13 economies. - Instruments evaluated (as reported): - LTV, DTI, risk weights, reserve requirement, provisioning requirement; also differential treatment of deposit accounts, liquidity requirements, interest rate controls, credit controls, open foreign exchange position limits, capital gains tax, stamp duties, ceilings on credit growth, exposure limits. - Main cross-country findings: - LTV, DTI, risk weights, reserve requirements, and provisioning requirements are repeatedly identified as effective in containing credit (to GDP) and house price growth (Arregui et al (2013); IMF (2012); Kuttner and Shim (2012); Lim et al (2011)). - LTV caps tend to have a decelerating effect on property price growth; LTVs and DTIs slow property lending growth (Ahuja and Nabar (2011); Kuttner and Shim (2012)). - New mortgage borrowings and house prices are more sensitive to aggregate income shocks in countries with higher LTVs (Almeida, Campello, Liu (2005)). - Composite measures of prudential instruments reduce the incidence of credit booms and decrease the probability that booms end up badly (Dell'Ariccia et al (2012)). - Reserve requirements are effective but associated with leakages in some settings (Arregui et al (2013)); average reserve requirements and a composite of other macroprudential policies had a moderate and transitory effect on credit growth in the Latin American panel (Tovar et al. (2012)). - Changes in minimum capital requirements and non-standard liquidity measures (marginal reserve requirements on foreign funding, marginal reserve requirements linked to credit growth) impact housing price inflation (Vandenbussche et al (2012)). - Tightening LTV caps reduces the sensitivity of mortgage default risk to property price shocks and would reduce household leverage (Wong et al (2011)). ### Individual-country analysis — selected country-level evidence - Studies and methodologies: - Ahuja and Nabar (2011), Hong Kong: VAR model. - Craig and Hua (2011), Hong Kong: Error-correction model of house price growth. - Galac (2010), Croatia: Regression of total private credit. - Igan and Kang (2011), South Korea: Regression of mortgage credit growth and house price growth. - Jiménez et al. (2012), Spain: Panel regression on comprehensive bank-, firm-, loan- and loan application-level data from 1999 to 2010. - Krznar and Medas (2012), Canada: Regression of mortgage credit growth and house price growth. - Wang and Sun (2013), China: Panel fixed-effects regression of loan growth, house price growth on 171 banks and 31 provinces between 2000 and 2011. - Country-level findings: - Hong Kong: LTV has small effect on credit; LTV tightening could affect property activity via expectations rather than the credit channel (Ahuja and Nabar (2011)). LTVs and stamp duties helped slow property price inflation (Craig and Hua (2011)). - Croatia: Credit growth ceiling reduced domestic private but not total private sector credit growth due to substitution with foreign corporate debt; marginal reserve requirement useful for building capital buffers (Galac (2010)). - South Korea: LTV and DTI reduce house price appreciation and transaction activity (Igan and Kang (2011)). - Spain: Dynamic provisioning mitigates credit supply cycles and has positive aggregate firm-level credit availability and real effects (Jiménez et al. (2012)). - Canada: LTV, DTI, and amortization period reduce mortgage credit and house price growth (Krznar and Medas (2012)). - China: Change in the reserve requirement is negatively associated with loan growth; house-related policies and reserve requirement effective with respect to house price growth; capital requirement and liquidity ratios ineffective in the reported specification (Wang and Sun (2013)). ### Policy notes — Taxation and Financial Stability - Topics covered: - Tax incentives to excess leverage (debt bias) under corporate and personal income tax. - Special taxes and levies on the financial sector. - Impact of taxation measures on asset prices. #### Debt bias — empirical magnitude and risks - Empirical evidence: - On average, a 10 percentage point lower corporate tax rate reduces the debt-asset ratio of nonfinancial companies by between 1.7 and 2.8 percentage points (De Mooij, 2011). - Long-run impact of a 10 percentage point change in the corporate tax rate on the leverage ratio of banks is estimated between 1.5 and 2.7 percent. - Eliminating the bias to debt finance created by a 25 percent corporate tax rate might increase banks’ capital in the long run by at least 3.75 percent of their assets: an increase of more than 30 percent over current levels (Keen and De Mooij, 2012). - Eliminating debt bias at high leverage ratios (as in some crisis countries in 2008) could avoid a loss in expected output of between 1.1 and 11.9 percent of GDP (cumulative over a four-year period) (De Mooij and others, 2013). #### Possible policy responses to debt bias - Comprehensive Business Income Tax (CBIT): - Denies interest deductions to establish tax neutrality between debt and equity. - Drawbacks: (i) increases cost of capital on debt-financed investment; (ii) raises significant problems with taxation of banks; (iii) distorts international financial transactions unless broadly adopted. - No country has adopted CBIT. - Thin capitalization rules are more common but do not fully address debt bias and often do not apply to banks. - Allowance for Corporate Equity (ACE): - Provides a deduction for a notional return on equity (in practice at something like the yield on government bonds) applied to the book value of equity minus equity participations in other firms. - ACE is neutral with respect to debt-equity choice and investment decisions. - Experience exists in Austria, Belgium, Brazil, Croatia, Italy, and Latvia; evidence suggests ACE reduces leverage ratios (Klemm (2007); Princen (2012)). - Tentative budgetary cost for advanced countries: average of 0.5 percent of GDP (Mooij, 2011). - Revenue loss mitigation options: - Apply ACE only to new investment (approach used by Italy). - Restrict ACE to banks (perhaps only for new equity) as an intermediate, sector-targeted approach to support capital buildup. #### Financial Sector Taxation - Corrective taxes (Financial Stability Contribution, FSC): - FSC proposed to address systemic externalities, linked to financing a credible resolution mechanism. - Simplest base: uninsured bank borrowing with a flat initial charge; could be refined to reflect institutions’ riskiness and systemic contributions. - Around a dozen European countries (including France, Germany, and the U.K.) have adopted bank taxes resembling an FSC; variation exists in rate, base, and revenue use. - Preliminary evidence suggests a large consequent increase in capital ratios (Devereux, Johannesen and Vella, 2013); U.K. levy has raised less than expected. - Financial sector taxes less directly related to financial stability: - VAT exemption of margin-based financial services creates distortions; first-best is to levy VAT on financial services, though implementation is complex. - Financial Activities Tax (FAT) is a second-best alternative that imposes a charge on the sum of financial institutions’ profits and remuneration (its value added) to offset VAT-exemption distortions. - FAT exists in Iceland, Israel, and Quebec; France and Denmark have imperfect variants. - FAT is inferior to full VAT taxation on financial services because business use of financial services may remain subject to tax and exported financial services raise treatment issues. - Primary purpose of FAT is to mitigate a pre-existing tax distortion rather than directly address financial stability. *Source: _061013c - Conclusion* ### 62. The Financial Transaction Tax (FTT) has many advocates as a way to address some ### 62. The Financial Transaction Tax (FTT) has many advocates as a way to address some ### Financial Transaction Tax (FTT) — overview and assessment - Several emerging economies (Colombia, India, Peru, Poland, Ukraine) and advanced countries (Belgium, Finland, Singapore, Sweden, Switzerland, and the U.K.) have forms of FTTs, including stamp duties that apply to a fairly narrow range of transactions. - In the EU, there are plans for 11 member states to adopt a much more broad-based form of FTT, under enhanced cooperation, at the start of 2014. - France and Italy have adopted forms of FTT in recent months, and have also adopted particular taxes on high frequency trade. - Key assessments: - FTTs are generally regarded as inferior to the FSC and the FAT in addressing core market failures in, or raising additional revenue from, financial markets. - Advocates argue discouraging short-term trading is desirable, but there is little evidence that short-term trading is a significant source of financial risk or that it was a major factor in the crisis.76 - There is no convincing evidence that FTTs reduce short-term price volatility; high transaction costs are likely to increase it. - Even at a modest rate, an FTT can have significant social costs due to cascading effects (tax levied on tax), increasing costs of capital, encouraging avoidance schemes, and potentially impeding socially worthwhile transactions.77 - From public finance principles, taxing intermediate transactions is a poor revenue strategy relative to consumption taxes (e.g., VAT). ### Taxation and asset prices — mechanisms and evidence - Taxes can powerfully affect asset prices through capitalization of higher future taxes (examples include capital gains taxes, stamp duties, recurrent property taxes). - Countries have used tax measures during crises to influence house prices (examples cited: removing or reducing stamp duties in Ireland, The Netherlands, and Singapore; extending mortgage interest relief in Ireland; Hong Kong and Singapore raised real property taxes to cool house prices). - Complexity and mixed evidence: - Lowering taxes on asset returns may have no effect if the marginal investor is tax exempt. - If higher property taxes finance public expenditures of equal value, house prices should remain unchanged. - Effects of stamp duties or real property taxes depend on supply/demand responses and frequency of market transactions. - Historical and empirical findings: - U.S. historical evidence suggests a significant negative correlation between asset prices and the tax burden on equity securities (Sialm, 2009). - Swiss data study finds no effect of transaction taxes or capital gains taxes on housing price dynamics (Aregger and others, 2013). - ECB noted transaction taxes appear to have had only a minor impact on asset price bubbles in Europe (ECB, 2003). - In Japan, increased land taxation immediately preceded the collapse of prices in the early 1990s (temporal association, not causation). - Taxes may affect not only price levels but their rate of change and volatility: - Example mechanism: if an asset yields return mainly as capital gains, increasing tax on gains requires faster price appreciation to yield same after-tax return. - Transaction taxes can discourage speculative transactions and reduce volatility, but can also cause lock-in effects, thinner markets, and greater price volatility. - Housing tax incentives and household vulnerability: - Favorable tax incentives for owner-occupied housing (light or no taxation of imputed rent and capital gains; generous mortgage interest relief) can shift productive capital into housing and encourage household borrowing against housing, increasing vulnerability to shocks. - Large and unexpected reforms in income tax treatment of housing can have large implications for home values and household financial positions; phased reforms (example: U.K. phasing out mortgage interest relief over many years) demonstrate feasibility. - Policy implications: - Purposive use of tax policy to affect asset prices is problematic due to timing, credibility, and side effects (e.g., reduced labor mobility from higher transactions taxes). - Natural focus for tax policy: ensure neutrality in treatment of differing assets and forms of income. - Macroprudential authorities should flag tax non-neutralities that risk distorting asset price levels and movements to the extent that they impair financial stability. ### B. The Role of Competition Policy in Supporting Financial Stability — framing - Traditional bank competition policy balances efficiency pressures with incentives to take risk; optimal market structure characterized by an intermediate degree of concentration. - Bank competition policy should include a macroprudential component because systemic risk is a relevant dimension for banks. - Theoretical and empirical evidence on competition, risk-taking, and stability is ambiguous but on net suggests an intermediate degree of bank competition is optimal. ### Literature and channels linking competition to risk and stability - Literature warns competition may increase bank risk-taking by lowering margins and charter value, prompting banks to gamble and reducing resilience (Marcus, 1984; Chan and others, 1986; Keeley, 1990; Hellman and others, 2000; Matutes and Vives, 2000; Repullo, 2004). - Competition can force banks to focus on market share over borrower screening (Dell’Ariccia and Marquez, 2006). - Opposite effects: competition can lower interest rates, making borrowers safer and reducing risk (Boyd and De Nicolo, 2005). - Reconciled by inverse U-shaped relationship between competition and stability: initial competition increases stability; excessive competition becomes destabilizing via charter value effects (Martinez-Miera and Repullo, 2010). - Empirical findings: - Evidence that too much competition may reduce stability (measured via margins or concentration vs. loan quality or failure probability) — Keeley, 1990; Dick, 2006; Jimemez and others, 2007; Boyd and Runkle, 1993; Beck and others, 2006a and 2006b. - Competition distorted credit quality during the recent crisis (Dell’Ariccia and others, 2012). - Some studies attribute stability effects of lower competition to diversification benefits in large banks (Paroush, 1995; Benston and others, 1995; Craig and Santos, 1997; Beck and others, 2006a and 2006b). - Too little competition may compromise stability via distortions in large banks increasing portfolio risk or operating closer to default (Chong, 1991; Hughes and Mester, 1998; De Nicolo, 2000; Boyd and others, 2006), and internal inefficiencies and operational risk (Beck and others, 2006; Laeven and Levine, 2007; Cetorelli and others, 2007). - Two effects together can lead to an inverse U-shaped effect of bank competition on stability (Fernandez and Maudos, 2011; Carbó-Valverde and others, 2013). - Caveats: - Competition benefits (lower costs, increased access) but can disadvantage information-sensitive borrowers and increase procyclicality when banks lack customer knowledge (multiple cited studies). - Changes in information technology increased availability of "hard" borrower information, reducing reliance on banks’ proprietary "soft" information and affecting competitive behavior. - Competition has become more international and cross-sectoral; domestic bank concentration is only one factor in the competitive environment. - Optimal market structure is country-specific, depending on financial development and regulatory quality. ### Policy tools to achieve intermediate competition - Policies focusing on market structure (concentration): - Entry/exit rules (for domestic and foreign banks); - Consolidation policy (particularly relevant around crises, when authorities can direct bank mergers; see Perotti and Suarez, 2003); - Restrictions on activities (non-lending activities of banks, and bank-like activities of non-banks such as insurance companies). - Policies affecting contestability in banking services (competition given market structure): - Establishing credit registries; - Providing equal access to infrastructure, such as payment systems; - Other measures that enable easier switching of banks by customers. ### Evidence from the crisis on market structure and stability - Evidence from the crisis on whether certain market structures enhanced banking system stability is somewhat weak. - Illustration (Figure 13 referenced): evidence consistent with some inverse U-shaped relationship between concentration and bank performance during the crisis, driven primarily by Canada and Australia (least affected countries). - Robustness concerns: - Banks from countries with similar concentration performed very differently (compare Canada, France, and Ireland). - Other factors (non-core exposures funded in wholesale markets, e.g., Germany and U.K.; high leverage, e.g., Ireland or Germany) played larger roles in explaining bank performance. - Additional reasons for weak link: - Evolution in financial services provision (more hard information reduces bank-customer relationship rents). - International and cross-sectoral competition (foreign bank entry, non-bank entrants) altered domestic competitive dynamics. - Relationship properties are highly country-specific (optimal market structure depends on financial development and regulatory quality). - Policy takeaway: Correct market structure is beneficial but not a panacea; appropriate prudential regulation across other dimensions is also essential. ### Additional lessons for bank competition policy and addressing TBTF - Crisis highlighted additional ways competition policy can support financial stability. - The TBTF (too-big-to-fail) problem: - Widely recognized as a major prudential concern: complex and interconnected banks cannot be easily wound down and have high incentives to take risk (O’Hara and Shaw, 1990; Flannery, 2009; Ueda and Weder di Mauro, 2012). - Current policy responses include Basel III capital surcharges for systemically important banks (SIBs). - The Basel SIFI capital surcharge is relatively small (up to 2.5 percent of risk-weighted assets) and might not provide sufficient incentives for banks to shrink or cut risks. - There is both a need and scope to use competition policy, in addition to regulatory measures, to address the TBTF problem. - Two approaches to using competition policy for TBTF: a quantity-based approach and a price-based approach (approaches introduced; further details follow in the source beyond the excerpt). *Key Aspects of Macroprudential Policy — background paper (excerpt).* ### 87. The quantity-based approach is to use competition policy tools to directly restrict ### _061013c - 87. The quantity-based approach is to use competition policy tools to directly restrict ### Quantity-based approach to bank size - Use competition policy tools to directly restrict bank size (limit mergers, force spin-offs). - Challenges: - Modern banks can act competitively and be efficient despite size. - Large banks may show spurious economies of scale because of: - (i) lower cost of funds due to the TBTF subsidy, - (ii) less borrower screening because they can afford more risk in lending operations, - (iii) more market-based activities, which are scalable but risky. - Hard to restrict bank size on pure competitive grounds. - Workarounds: - Let competition policy adopt an explicit macroprudential objective to address welfare costs of possible crises. - Focus on sub-segments of bank operations where size is detrimental to competition (e.g., dealing with opaque customers such as small business borrowers or customers intensive in “local” information). - Policy rationale: Ensuring access to finance on competitive terms for opaque customers may justify restricting bank size or facilitating bank entry on competitive grounds. ### Price-based approach to TBTF distortions - Use competition policy to correct competitive distortions created by TBTF (too-big-to-fail). - Key distortion: uneven playing field because large banks have access to cheaper funding due to implicit TBTF guarantees. - Empirical magnitude cited: funding advantage can be as high as 80 basis points a year (Ueda and Weder di Mauro, 2012). - Consequences: - Affects static competition, is a barrier to entry, creates socially inefficient incentives for banks to grow. - Direct tool: impose taxes or fines on large banks to extract their unfair competitive advantage (example: a tax on wholesale funding of banks, with a rate increasing in bank size). - From competition policy perspective: ensures level playing field. - From prudential perspective: reduces incentives for banks to grow, reducing TBTF problem and enhancing financial stability. ### Interaction with structural policies - Definition: Structural policies are prudential measures that restrict bank or non-bank activities that contribute to systemic risk. - Crisis evidence: many bank failures were consequences of non-core, market-based activities (securitized credit, originate-to-distribute, carry trade, proprietary trading). - Non-bank role: under-regulated non-banks amplified housing bubbles via lending. - Recent structural policy initiatives and competitive effects: - Proposals to restrict market-based activities of banks (examples cited: prohibition of proprietary trading in the Volcker Rule; segregation of non-core activities in Vickers and Liikanen proposals). - Rationale: non-core activities are risky and have low margins; restricting them might boost charter value and increase bank stability. - Benefit for competition policy: separating core (less contestable) from non-core (more contestable, including international) activities allows more targeted competition policy and clearer competitive environment for core activities. - Structural measure: restrict competition in lending from non-banks. - Pre-crisis non-bank lending was riskier and exerted pressure on banks to chase market share, amplifying mortgage bubble. - Lax regulatory standards for non-banks created artificial competitive advantage. - Competition policy can insist on a level playing field by requiring non-banks to face the same or similar prudential standards to compete directly with banks. - Structural problem: excess competition for retail deposits. - Retail deposits are scarce and valuable as stable, insured funding. - Sources of excess competition: - Competition from non-banks for household savings (examples: Australia, the Nordics). - Competition from local savings banks with implicit public guarantees (example: Germany). - Outcome: banks relied on wholesale funding, increasing vulnerability during the crisis. - Competition policy can assist by establishing a level playing field in access to household savings, including addressing implicit guarantees and lax regulation of non-banks. ### Competition policy and crisis management - Tension: competition policy favors limited government involvement to preserve level playing field; crisis management may require government ownership or guarantees to maintain stability and lending capacity. - Exceptional crisis measures may include government control to direct restructuring or rebuilding charter values. - Competition policy should: - Acknowledge trade-off between effective bank resolution and preserving level playing field. - Aim to strike a balance and may temporarily allow higher banking system concentration when necessary for resolution or restructuring. ### Conclusions (lessons) - Lesson 1: - Degree of competition affects bank risk-taking; bank competition policy should have a macroprudential component. - Sometimes sacrificing some competition is needed to ensure more financial stability. - Bank competition policy may require rules distinct from those for non-financial firms. - Competition authority needs to cooperate with the prudential regulator. - Strong rationale exists to have financial stability as an objective of the financial competition authority. - There may be rationale to transfer some responsibility for bank competition (insofar as it affects financial stability) to the prudential regulator. - Lesson 2: - Bank competition policy can respond to specific prudential concerns: - Help deal with the TBTF problem. - Address structural sources of financial instability related to scope of activities. - By temporarily allowing higher concentration or government control, facilitate effective crisis resolution. ### Case study A — Ireland: Competition and the Crisis - Context and causes: - Ireland’s euro membership increased foreign institution expansion and access to cheap foreign funding for domestic credit institutions. - Foreign banks lowered lending standards, domestic banks followed, tapped wholesale funding, and credit expanded rapidly while lending standards deteriorated. - Market structure: - Share of foreign banks to total number of banks in Ireland increased from 80 percent in 1999 to 90 percent in 2009 (Claessens and Horen, 2012). - By end of 2012, total credit institutions in Ireland: 73; foreign-owned: 56. - Competitive effects on lending: - Competition led domestic banks to offer tracker mortgages and 100 percent LTV loans; streamlined loan approval processes. - Bank managers faced dilemma: compete with aggressively priced products or lose market share and face takeover risk. - Anglo Irish Bank exemplified culture of approving problematic applications to retain business. - Funding composition and vulnerabilities: - Total assets grew by a factor of 7.5; retail deposits grew from €44 billion to €150 billion over the period. - Retail funding decreased to just 8 percent of total liabilities on the eve of the crisis. - Non-core liabilities increased, notably deposits from non-Irish residents: from €79 billion in 2003 to €271 billion in 2008. - Debt securities issued to foreign investors contributed €54 billion toward the increase in the balance sheet between 2003 and 2008. - Stability indicators: - Net interest margins and Z-scores fell sharply from 2003 as systemic vulnerabilities from excessive competition built up. - Z-score interpretation: number of standard deviations by which returns would have to fall from the mean to wipe out all equity in the bank. ### Case study B — Israel: Challenges in Taming Housing Booms - Macroeconomic context: - BOI policy interest rates cut from 4.25 percent in September 2008 to 0.5 percent by April 2009. - Lower rates, liquidity measures, and limited land supply contributed to a buoyant housing market; banks expanded mortgage lending. - Between 2008Q4 and 2011Q1, real house prices surged by 38 percent. - BOI policy response (macroprudential measures and supervisory actions; dates and exact values preserved): - August 2009: requested banks to tighten risk management, scrutinize mortgage loans to households, and enhance disclosure, particularly for loans carrying floating interest rates extended to households. - July 2010: instituted a supplementary reserve requirement of 0.75 percent for all outstanding mortgages with a LTV ratio that exceeds 60 percent. - October 2010: imposed a capital charge of 100 percent (instead of 35 percent) on all loans over a threshold of NIS 800,000 that have a floating interest rate component that applies to more than 25 percent of the principal of the loan and involves a LTV ratio that exceeds 60 percent. - May 2011: required that the adjustable interest rate component of a mortgage loan apply to no more than one-third of the principal amount of the loan, and that banks notify customers whose mortgage loans carry a floating interest rate component that applies to one-third or more of the loan. *Source: KEY ASPECTS OF MACROPRUDENTIAL POLICY—BACKGROUND PAPER, INTERNATIONAL MONETARY FUND* ### 107. Real house price growth moderated from 2011Q1, but picked up again in 2012, and ### Real house price growth moderated from 2011Q1, but picked up again in 2012, and ### Macroprudential measures (2012–2013) - By July 2012 the BOI adopted further macroprudential policies while the economic environment had worsened and inflation was on the decline. - Measures included: - imposing a 100 percent capital charge on groups of borrowers that collectively bought property for residential projects and engaged third parties to execute the construction and development of the property (July 2012) - Imposing a limit of 70 percent on LTV for housing loans—excluding first-time buyers, for which a maximum LTV of 75 percent would apply. In addition, LTV for mortgage loans for investment purposes could not exceed 50 percent (November 2012) - In February 2013, further measures were proposed, including increased capital requirements (though graduated risk weights by LTV levels), and higher provisioning for housing loans. ### Policy challenges - Central banks also responsible for bank supervision need to be prepared for the potential for tension between the objectives of price stability and financial stability. - In Israel: - During the recovery episode both the economy and the housing market picked up; the BOI’s interest rate increases and its adoption of macroprudential policies went in the same direction. - In 2011, global economic conditions were volatile and particularly uncertain, threatening Israel’s recovery, and inflation subdued, while house prices looked to be picking up strongly again. - Price stability and financial stability objectives were pointing to policy actions in opposing directions: loosen monetary and tighten financial. - The BOI implemented looser monetary policy to address price stability issues and tightened macroprudential policy to contain financial stability risk. ### Communications and accountability - Communications of policy objectives and intentions can be particularly challenging when policy actions seem to go in opposing directions. - The BOI: - Has taken care to explain its decisions carefully, signaling its concern on the housing market and linking this to macroprudential policy actions taken in this context. - Made publicly clear that monetary policy decisions were separate from macroprudential policy decisions. - Assigned responsibility: The Monetary Committee was responsible (and accountable) for the interest rate decision, while the decision on LTV was the responsibility of the Supervisor of Banks. ### Social and political sensitivities - Housing is a politically sensitive issue; in 2011, large public protests took place, including to call for more affordable housing. - The BOI’s actions to restrain house price inflation have sometimes generated negative commentary in the press, particularly with respect to reducing access to mortgage loans when LTV limits were tightened. *Source: _061013c - 107.* ### References ### _061013c - References ### Macroprudential policy design, instruments, and frameworks - Adrian, Tobias & Shin, Hyun Song, 2010, "Liquidity and Leverage," Journal of Financial Intermediation, Elsevier, Vol. 19(3), pp. 418–437, July. - Angeloni, Ignazio, Ester Faia and Roland Winkler, 2011, “Exit Strategies," Kiel Working Papers 1676, Kiel Institute for the World Economy. - Bank of England, 2011, “Instruments of Macroprudential Policy,” Discussion Paper, December (London: Bank of England). - Basel Committee on Banking Supervision, 2010, “Countercyclical Capital Buffer Proposal, Consultative Document,” Bank for International Settlements, Basel. - Committee on the Global Financial System, 2012, “Operationalising the Selection and Application of Macroprudential Instruments,” CGFS Papers 48 (Basel: Bank for International Settlements). - De Nicolò, Gianni, Giovanni Favara and Lev Ratnovski, 2012, “Externalities and Macroprudential Policy,” IMF Staff Discussion Note 12/05. - Drehmann, Mathias, Claudio Borio and K. Tsatsaronis, 2011, “Anchoring Countercyclical Capital Buffers: the Role of Credit Aggregates,” International Journal of Central Banking, Vol. 7, No. 4, December 2011. - Drehmann Mathias and Leonardo Gambacorta, 2012, “The Effects of Countercyclical Capital Buffers on Bank Lending,” Applied Economics Letters, Taylor and Francis Journals, Vol. 19(7), pp. 603–608, May. - Elliott, Douglas J., 2011, “Choosing among Macroprudential Tools,” The Brookings Institution, June 2011. - Galati, Gabriele and Richhild Moessner, 2011, “Macroprudential policy—a Literature Review,” BIS Working Papers 337, Bank for International Settlements. - Lim, Cheng H., Francesco Columba, Alejo Costa, Piyabha Kongsamut, Akira Otani, Mustafa Saiyid, Torsten Wezel, Xiaoyong Wu, 2011, “Macroprudential Policy: What Instruments and How Are They Used? Lessons from Country Experiences,” IMF Working Paper 11/238 (Washington: International Monetary Fund). - Macroeconomic Assessment Group, 2010, “Assessing the Macroeconomic Impact of the Transition to Stronger Capital and Liquidity Requirements—Final Report,” Basel Committee on Banking Supervision, December. - Reserve Bank of New Zealand, 2013, “Macro-prudential Policy Instruments and Framework for New Zealand,” Consultation Paper, March (Wellington: Reserve Bank of New Zealand). - Shin, Hyun Song, 2010b, “Macroprudential Policies Beyond Basel III,” Policy memo. ### Countercyclical capital buffers, capital regulation, and bank capital - Angelini, Paolo, Laurent Clerc, Vasco Cúrdia, Leonardo Gambacorta, Andrea Gerali, Alberto Locarno, Roberto Motto, Werner Roeger, Skander Van den Heuvel and Jan Vlcek, 2011, “BASEL III: Long-term Impact on Economic Performance and Fluctuations, “ BIS Working Papers No. 338. - Agenor, Pierre-Richard, Koray Alper and Luiz Pereira da Silva, 2011, “Capital Regulation, Monetary Policy and Financial Stability,” Working Paper No. 237, Central Bank of Brazil, April. - Devereux, Michael, Nils Johannesen and John Vella, 2013, “Can Taxes Tame Banks? Capital Structure Responses to the Post-Crisis Bank Levies,” paper presented at the CESifo Area Conference on Public Sector Economics, Munich, April 11–13. - Flannery, Mark J., 1989, “Capital Regulation and Insured Banks’ Choice of Individual Loan Default Risks,” Journal of Monetary Economics, Vol. 24, pp. 235–58. - Gambacorta, Leonardo and Paolo Emilio Mistrulli, 2004, “Bank Capital and Lending Behaviour: Empirical Evidence for Italy,” Journal of Financial Intermediation, 13(4):436–457. - Repullo, Rafael and Jesús Saurina, 2011, “The Countercyclical Capital Buffer of Basel III: A Critical Assessment,” CEPR Discussion Papers 8304, C.E.P.R. Discussion Papers. - Repullo, Rafael Jesús Saurina and Carlos Trucharte, 2010, “Mitigating the Pro-cyclicality of Basel II,” Economic Policy, 64, pp. 659–702. - Drehmann, Mathias, Claudio Borio, Leonardo Gambacorta, Gabriel Jiménez, and Carlos Trucharte, 2010, “Countercyclical Capital Buffers: Exploring Options,” BIS Working Papers No. 298. ### Bank competition, concentration, consolidation, and systemic risk - Allen, Franklin. and Douglas Gale, 2004, “Competition and Financial Stability,” Journal of Money, Credit, and Banking, Vol. 36(3) Pt.2, pp. 433–80. - Beck, Thorsten, and Asli. Demirgüç-Kunt, 2009, “Financial Institutions and Markets across Countries and over Time: Data and Analysis,” World Bank Policy Research Working Paper 4943. - Beck, Thorsten, 2008, “Bank Competition and Financial Stability: Friends or Foes,” World Bank Policy Research Working Paper 4656. - Beck, Thorsten, Asli Demirgüç-Kunt, and Ross Levine, 2006a, “Bank Concentration, Competition, and Crises: First Results,” Journal of Banking and Finance, 30, pp. 1581–603. - Beck, Thorsten, Asli Demirgüç-Kunt, and Ross Levine, 2006b, “Bank Concentration and Fragility: Impact and Mechanics,” In: Stulz, R., and Carey, M. (eds), The Risks of Financial Institutions, National Bureau of Economic Research. - Berger, Allen, Asli Demirgüç-Kunt, Ross Levine, and Joseph Haubrich, 2004, “Bank Concentration and Competition: An Evolution in the Making,” Journal of Money, Credit, and Banking, Vol. 36, pp. 433–53. - Cetorelli, Nicola, Beverly Hirtle, Donald Morgan, Stavros Peristiani, and João Santos, 2007, “Trends in Financial Market Concentration and Their Implications for Market Stability,” Economic Policy Review, Federal Reserve Bank of New York, March. - Karceski, Jason, Steven Ongena, and David C. 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Evidence from Korea,” IMF Working paper 11/297 (Washington: International Monetary Fund). - Genworth Financial, 2012, “Managing Over-indebtedness and Macro-prudential Risk in the Finnish Mortgage Market,” mimeo. - European Central Bank, 2003, Structural Factors in the EU Housing Markets. ### Liquidity, funding risks, and non-core liabilities - Huang, Rocco, and Lev Ratnovski, 2009, “Why Are Canadian Banks More Resilient?” IMF Working Paper 09/152. - Huang, Rocco, and Lev Ratnovski, 2011, “The Dark Side of Bank Wholesale Funding,” Journal of Financial Intermediation, Vol. 20(2), pp. 248–63. - Perotti, Enrico and Javier Suarez, 2011, “A Pigovian Approach to Liquidity Regulation,” International Journal of Central Banking, Vol. 7(4), pp. 3–41. - Perotti, Enrico and Javier Suarez, 2010, “Liquidity Risk Charges as a Primary Macroprudential Tool,” DSF Policy Paper Series, No. 1, January (Amsterdam: Duisenberg School of Finance). - Shin, Hyun Song, 2010a, “Non-Core Liabilities Tax as a Tool for Prudential Regulation,” Policy memo. - Ree, Jack Joo K., Kyungsoo Yoon, and Hail Park, 2012, “FX Funding Risks and Exchange Rate Volatility-Korea’s Case,” IMF Working Paper 12/268 (Washington: International Monetary Fund). ### Taxation, incentives, and regulatory/arbitrage issues - De Mooij, Ruud, 2011, “The Tax Elasticity of Corporate Debt: A Synthesis of Size and Variations,” IMF Working Paper 11/95 (Washington: International Monetary Fund). - De Mooij, Ruud, Michael Keen, and Orihara Masanori, 2013, “Taxation, Bank Leverage, and Financial Crises,” IMF Working Paper 13/48 (Washington: International Monetary Fund). - Keen, Michael, 2011a, “Rethinking the Taxation of the Financial Sector,” CESifo Economic Studies 57, pp. 1–24. - Keen, Michael, 2011b, “The Taxation and Regulation of Banks,” IMF Working Paper 11/206 (Washington: International Monetary Fund). - Keen, Michael, and Ruud De Mooij, 2012, “Debt, Taxes and Banks,” IMF Working Paper 12/48 (Washington: International Monetary Fund). - Degryse, Hans, Nancy Masschelein, and Janet Mitchell, 2005, “SMEs and Bank Lending Relationships: The Impact of Mergers,” CEPR Working Paper No. 5061. - Demyanyuk, Yulia, and Elena Loutskina, 2012, “Mortgage Companies and Regulatory Arbitrage,” Federal Reserve Board of Cleveland Working Paper 12–20R. - Princen, Savina, 2012, “Taxes do Affect Corporate Financing Decisions: The Case of Belgian ACE,” CESifo Working Paper No. 3713. - Matheson, Thornton, 2012, “Security Transactions Taxes: Issues and Evidence,” International Tax and Public Finance 19, pp. 884–912. ### Data, databases, and empirical evidence on crises and systemic stress - Laeven, Luc and Fabian Valencia, 2012, “Systemic Banking Crises Database: An Update,” IMF Working Paper 12/163. - Valencia, Fabian and Luc Laeven, 2012, “Systemic Banking Crises Database: An Update,” IMF Working Papers 12/163, International Monetary Fund. - Borio, Claudio and Philip Lowe, 2002, “Assessing the Risk of Banking Crises,” BIS Quarterly Review, December, pp. 43–54. - Borio, Claudio and Mathias Drehmann, 2009, “Assessing the Risk of Banking Crises—Revisited,” BIS Quarterly Review, March, pp. 29–46. - Arsov, Ivailo, Elie Canetti, Laura Kodres, and Srobona Mitra, forthcoming, “Near-Coincident Indicators of Systemic Stress,” IMF Working Paper, (Washington: International Monetary Fund). - Claessens, Stijn, 2009, “Competition in the Financial Sector: Overview of Competition Policies,” IMF Working Paper 09/45. Also in: World Bank Research Observer, 2009, 24:1, 83–118 (February). - Jordà, Òscar, Moritz Schularick and Alan M Taylor, 2010, “Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons,” NBER Working Paper No. 16567. - Macroeconomic Assessment Group, 2010, “Assessing the Macroeconomic Impact of the Transition to Stronger Capital and Liquidity Requirements—Final Report,” Basel Committee on Banking Supervision, December. ### Selected empirical and theoretical studies on bank behavior, relationships, and risk - Acharya, Viral V., Thomas Cooley, Mathew Richardson, and Ingo Walter, 2010, “Manufacturing Tail Risk: A Perspective on the Financial Crisis of 2007–09,” Foundations and Trends in Finance, 4. - Amato, Jeffery D. and Craig H. Furfine, 2004, “Are Credit Ratings Procyclical?” Journal of Banking and Finance 28, 2641–2677. - Bae, Kee-Hong, Jun-Koo Kang, and Chan-Woo Lim, 2002, “The Value of Durable Bank Relationships: Evidence from Korean Banking Shocks,” Journal of Financial Economics, Vol. 64, pp. 181–214. - Benston, George J., William C. Hunter, Larry D. Wall, 1995, “Motivations for Bank Mergers and Acquisitions: Enhancing the Deposit Insurance Put Option Versus Earnings Diversification,” Journal of Money, Credit and Banking, Vol. 27, pp. 777–788. - Boyd, John H., and David Runkle, 1993, “Size and Performance of Banking Firms,” Journal of Monetary Economics, Vol. 31, pp. 47–67. - Boyd, John H., and Gianni De Nicoló, 2005, “The Theory of Bank Risk-Taking and Competition Revisited,” Journal of Finance, Vol. 60, pp. 1329–343. - Boyd, John H., Gianni De Nicoló, and Abu M. Jalal, 2006, “Bank Risk Taking and Competition: New Theory, New Empirics,” IMF Working Paper 06/297. - Petersen, Mitchell., and Raghuram Rajan, 1994, “The Benefits of Lending Relationships: Evidence from Small Business Data,” Journal of Finance, Vol. 49(1), pp. 3–37. - Petersen, Mitchell., and Raghuram Rajan, 1995, “The Effect of Credit Market Competition on Lending Relationships,” Quarterly Journal of Economics, Vol. 110, pp. 407–435. - Kiyotaki, Nobuhiro, and John Moore, 1997, “Credit Cycles,” Journal of Political Economy, Vol. 105, pp. 211–48. - Geanakoplos, John, 2010, “Solving the Present Crisis and Managing the Leverage Cycle,” FRB of New York Economic Policy Review, August, pp. 101–131 (New York: Federal Reserve Bank). *International Monetary Fund — _061013c - References* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_061013c.pdf_