Macroprudential Regulation and Sector-Specific Default Risk

IMF Working Papers, July 15, 2022

Source details

Authors: Mohamed Belkhir, Sami Ben Naceur, Bertrand Candelon, Jean-Charles Wijnandts
Published: July 15, 2022
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400215421.001

Title: Macroprudential Regulation and Sector-Specific Default Risk
Authors: Mohamed Belkhir, Sami Ben Naceur, Bertrand Candelon, Jean-Charles Wijnandts
Date: July 15, 2022
Series: IMF Working Papers, Working Paper No. 2022/141
Pages: 36
Volume: 2022
Issue: 141
DOI: https://doi.org/10.5089/9798400215421.001
ISBN: 9798400215421
ISSN: 1018-5941

Tighter macroprudential regulations implemented in Europe over the period 2008–2017 lowered default risk in both:
- the financial sector, and
- the non-financial sectors.
Two reforms in the macroprudential framework produce distinct effects:
- Higher capital requirements:
- improve the long-run resilience of the financial sector, but
- raise long-term default risk in non-financial sectors.
- Strengthening the resolution framework for failing banks:
- has beneficial long-run effects on the default risks of both the financial and non-financial sectors.
Results are consistent with literature showing banks adjust balance sheet composition and credit supply in reaction to changes in their regulatory environment.

Higher capital requirements strengthen financial-sector resilience but can transfer risk to non-financial sectors via changes in bank behavior and credit supply.
Strengthened bank resolution frameworks (e.g., measures to manage failing banks) yield beneficial long-run outcomes for default risk across sectors.
Policymakers should consider cross-sectoral transmission when designing macroprudential reforms: regulatory tightening in the banking sector may have adverse long-term effects outside the financial sector unless complemented by measures that mitigate credit contraction or risk-shifting.

Subject areas: Debt default, Economic sectors, External debt, Financial sector, Financial sector policy and analysis, Financial sector stability, Macroprudential policy
Keywords include: balance sheet com position, Bank bail-in, Capital requirements, credit supply, Debt default, default horizon, default probability, Default risk, descriptive statistics, EA country, Europe, Financial sector, Financial sector stability, Global, impact of the INTRODUCTION, INTRODUCTION of BRRD, Macroprudential policies evaluation database, Macroprudential policy, Macroprudential regulation, subsamples of euro area

Source: "Macroprudential Regulation and Sector-Specific Default Risk", IMF Working Papers No. 2022/141 (July 15, 2022).