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Banks' leverage in foreign exchange derivatives in times of crisis: A tale of two countries

Author

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  • Giraldo, Carlos
  • Giraldo, Iader
  • Gomez-Gonzalez, Jose E.
  • Uribe, Jorge M.

Abstract

Before the outbreak of the Global Financial Crisis, on May 6, 2007, the Colombian central bank imposed a cap on the Gross Leverage Position in Foreign Exchange Derivatives of financial intermediaries. It was the only country in the world that implemented this prudential policy. Using synthetic control methods, we construct counterfactual scenarios and show that this policy intervention, while costly in financial stability terms in the pre-GFC period, was effective in reducing Colombia's financial stability risks during the crisis. A trade-off between “calm” and “turbulent” periods emerges from our results, which should be considered when deciding on the right policy tools to use before a crisis break-out.

Suggested Citation

  • Giraldo, Carlos & Giraldo, Iader & Gomez-Gonzalez, Jose E. & Uribe, Jorge M., 2023. "Banks' leverage in foreign exchange derivatives in times of crisis: A tale of two countries," Emerging Markets Review, Elsevier, vol. 55(C).
    • Handle: RePEc:eee:ememar:v:55:y:2023:i:c:s156601412300033x
    DOI: 10.1016/j.ememar.2023.101028
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    More about this item

    Keywords

    PBA; Synthetic control; Macroprudential policy;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls

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