Leakages from Macroprudential Regulations: The Case of Household-Specific Tools and Corporate Credit

IMF Working Papers, April 29, 2021

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Sector-specific macroprudential regulations increase the riskiness of credit to other sectors.
Using firm-level data for 29 advanced and emerging economies, the paper computes measures of the riskiness of corporate credit allocation.
During credit expansions, an unexpected tightening of household-specific macroprudential tools is followed by a rise in riskier corporate lending.
Quantitatively, such unexpected tightening during a period of rapid credit growth increases the riskiness of corporate credit by around 10 percent of the historical standard deviation.
Leakage effects are stronger for larger firms compared to SMEs, consistent with evidence on the use of personal real estate as loan collateral by small firms.

Coverage: firm-level data across 29 advanced and emerging economies.
Risk measure: computed measures of the riskiness of corporate credit allocation (details in the paper).

The observed leakages imply that sectoral macroprudential tightening can shift risk to other sectors, raising aggregate financial stability concerns.
Early policy interventions, when credit vulnerabilities are still low, are supported because sectoral leakages will be less important at that stage.
Monitoring cross-sectoral effects is important when designing household-specific macroprudential tools to limit unintended increases in corporate credit risk.

Evidence from bank lending standards surveys corroborates the finding that leakage effects disproportionately affect larger firms relative to SMEs.