Reducing Risks in Asia with Macroprudential Policies
IMF Blog, April 30, 2014
Source details
- Canonical URL
- Reducing Risks in Asia with Macroprudential Policies
Other formats
Bibliographic details
- Authors: Edda Zoli
- Published: April 30, 2014
Context and challenges
- Booming real estate markets, rapid credit growth and—at least before the Fed’s tapering announcement last year—sustained capital inflows have raised financial stability challenges across many parts of Asia.
- Policymakers have increasingly used macroprudential policies that address the stability of the financial system as a whole rather than that of individual institutions.
- In some cases policymakers have also resorted to capital flow management measures to counter large capital inflows.
Use of macroprudential policies in Asia
- Asia stands out for more extensive use of macroprudential measures than elsewhere, particularly housing-related measures.
- Many economies in the region have been heavy users of caps on loan-to-value ratios (the ratio between the size of the mortgage loan and the value of the house being purchased).
- Since 2000 tightening of loan-to-value ratios has occurred more than twice as often in Asia as it has in Central and Eastern Europe/Community of Independent States, advanced Europe, and North America.
- Macroprudential policies were most heavily tightened in the pre‑crisis boom period during 2006–07, and then again after the crisis as capital flowed back into the region and asset prices soared.
- Economies that experienced large capital inflows or housing and credit booms (Hong Kong SAR, Korea, Singapore, and Thailand) were the heaviest users.
- Asian economies with relatively less open financial accounts have taken a smaller number of residency-based capital flow measures or actions to discourage transactions in foreign currency than countries in Central and Eastern Europe and Latin America.
Empirical evidence and impacts
- New empirical evidence on 13 Asian economies since 2000 indicates the following effects of housing-related macroprudential instruments:
- Caps on loan-to-value ratios and the taxation of housing transactions have helped lower credit growth.
- These measures have slowed house price inflation.
- These measures have dampened bank leverage (although the latter effect is fairly small).
- No such effects are found for non-housing related macroprudential policies and capital flow measures in the empirical analysis presented; however, some non-housing measures may still have boosted resilience to shocks.
- Example: Measures introduced in Korea in 2010 to discourage foreign currency transactions have been followed by a decline in banks’ short-term foreign currency borrowing, thus reducing their vulnerability to foreign funding shocks.
- Overall assessment: while macroprudential policies are no substitute for warranted macroeconomic policy adjustment, they seem to have served the region well.
Recalibrating macroprudential policies — considerations and recommendations
- Macroprudential policies were loosened in a counter-cyclical fashion during the 2008–09 global financial crisis.
- More experience is needed on whether and how these instruments should be recalibrated as the financial cycle turns.
- The main policymaker challenge: strike the right balance between preserving future resilience to shocks and averting asset price collapses and excessive deleveraging.
- The rolling back of policies may depend on factors such as:
- how acute is the downturn in the financial cycle, and
- how strong are local balance sheets,
- and may vary across different measures.
- Specific policy implications suggested:
- Accumulated capital buffers would typically be used to avoid a procyclical contraction in loan supply.
- Widespread adoption across Asia of countercyclical capital requirements and dynamic provisioning in the future could be helpful to foster the buildup of buffers in the upward phase of the cycle.
- In a downswing of the financial cycle, reserve requirements could also be lowered to release additional liquidity.
- Whether policymakers should ease housing-related tools and measures to discourage foreign currency transactions is more controversial.
- Where regulation is currently very tight, there may be a case for relaxing these instruments after assessing the soundness of banks’ and households’ balance sheets.
Source: Reducing Risks in Asia with Macroprudential Policies, Edda Zoli, April 30, 2014.
Content in this bundle
- 亚洲运用宏观审慎政策降低风险; iMFDirect博客; Edda Zoli
- マクロ・プルーデンス政策でアジアにおけるリスクを軽減; エッダ・ゾリ, iMFdirect ブログ 2014年4月30日掲載
- Regional Economic Outlook: Asia and Pacific — Executive Summary
