IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/25083.html
   My bibliography  Save this paper

Macroprudential FX Regulations: Shifting the Snowbanks of FX Vulnerability?

Author

Listed:
  • Toni Ahnert
  • Kristin Forbes
  • Christian Friedrich
  • Dennis Reinhardt

Abstract

Can macroprudential foreign exchange (FX) regulations on banks reduce the financial and macroeconomic vulnerabilities created by borrowing in foreign currency? To evaluate the effectiveness and unintended consequences of macroprudential FX regulations, we develop a parsimonious model of bank and market lending in domestic and foreign currency and derive four predictions. We confirm these predictions using a rich dataset of macroprudential FX regulations. These empirical tests show that FX regulations: (1) are effective in terms of reducing borrowing in foreign currency by banks; (2) have the unintended consequence of simultaneously causing firms to increase FX debt issuance; (3) reduce the sensitivity of banks to exchange rate movements, but (4) are less effective at reducing the sensitivity of corporates and the broader financial market to exchange rate movements. As a result, FX regulations on banks appear to be successful in mitigating the vulnerability of banks to exchange rate movements and the global financial cycle, but partially shift the snowbank of FX vulnerability to other sectors.

Suggested Citation

  • Toni Ahnert & Kristin Forbes & Christian Friedrich & Dennis Reinhardt, 2018. "Macroprudential FX Regulations: Shifting the Snowbanks of FX Vulnerability?," NBER Working Papers 25083, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25083
    Note: CF IFM ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w25083.pdf
    Download Restriction: Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Forbes, Kristin & Fratzscher, Marcel & Kostka, Thomas & Straub, Roland, 2016. "Bubble thy neighbour: Portfolio effects and externalities from capital controls," Journal of International Economics, Elsevier, vol. 99(C), pages 85-104.
    2. Martin Brown & Karolin Kirschenmann & Steven Ongena, 2014. "Bank Funding, Securitization, and Loan Terms: Evidence from Foreign Currency Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(7), pages 1501-1534, October.
    3. Forbes, Kristin & Fratzscher, Marcel & Straub, Roland, 2015. "Capital-flow management measures: What are they good for?," Journal of International Economics, Elsevier, vol. 96(S1), pages 76-97.
    4. Philip R. Lane & Jay C. Shambaugh, 2010. "Financial Exchange Rates and International Currency Exposures," American Economic Review, American Economic Association, vol. 100(1), pages 518-540, March.
    5. Jonathan Kearns & Nikhil Patel, 2016. "Does the financial channel of exchange rates offset the trade channel?," BIS Quarterly Review, Bank for International Settlements, December.
    6. Kuttner, Kenneth N. & Shim, Ilhyock, 2016. "Can non-interest rate policies stabilize housing markets? Evidence from a panel of 57 economies," Journal of Financial Stability, Elsevier, vol. 26(C), pages 31-44.
    7. Eugenio Cerutti & Ricardo Correa & Elisabetta Fiorentino & Esther Segalla, 2017. "Changes in Prudential Policy Instruments - A New Cross-Country Database," International Journal of Central Banking, International Journal of Central Banking, vol. 13(2), pages 477-503, March.
    8. Bräuning, Falk & Ivashina, Victoria, 2016. "Monetary policy and global banking," Working Papers 17-5, Federal Reserve Bank of Boston.
    9. Ambrogio Cesa‐Bianchi & Luis Felipe Cespedes & Alessandro Rebucci, 2015. "Global Liquidity, House Prices, and the Macroeconomy: Evidence from Advanced and Emerging Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S1), pages 301-335, 03.
    10. Bruno, Valentina & Shim, Ilhyock & Shin, Hyun Song, 2017. "Comparative assessment of macroprudential policies," Journal of Financial Stability, Elsevier, vol. 28(C), pages 183-202.
    11. Bénétrix, Agustin S. & Lane, Philip R. & Shambaugh, Jay C., 2015. "International currency exposures, valuation effects and the global financial crisis," Journal of International Economics, Elsevier, vol. 96(S1), pages 98-109.
    12. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 663-691.
    13. Jérôme Vandenbussche & Ursula Vogel & Enrica Detragiache, 2015. "Macroprudential Policies and Housing Prices: A New Database and Empirical Evidence for Central, Eastern, and Southeastern Europe," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S1), pages 343-377, March.
    14. Jing Cynthia Wu & Fan Dora Xia, 2016. "Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(2-3), pages 253-291, March.
    15. Sebnem Kalemli-Ozcan & Herman Kamil & Carolina Villegas-Sanchez, 2016. "What Hinders Investment in the Aftermath of Financial Crises: Insolvent Firms or Illiquid Banks?," The Review of Economics and Statistics, MIT Press, vol. 98(4), pages 756-769, October.
    16. Mihir A. Desai & C. Fritz Foley & Kristin J. Forbes, 2008. "Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Depreciations," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2857-2888, November.
    17. Kappler, Marcus & Reisen, Helmut & Schularick, Moritz & Turkisch, Edouard, 2013. "The Macroeconomic Effects of Large Exchange Rate Appreciations," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics, pages 471-494.
    18. Furceri, Davide & Loungani, Prakash & Zdzienicka, Aleksandra, 2018. "The effects of monetary policy shocks on inequality," Journal of International Money and Finance, Elsevier, vol. 85(C), pages 168-186.
    19. Ilhyock Shim & Bilyana Bogdanova & Jimmy Shek & Agne Subeltye, 2013. "Database for policy actions on housing markets," BIS Quarterly Review, Bank for International Settlements, September.
    20. Lieven Baele, 2010. "The Determinants of Stock and Bond Return Comovements," Review of Financial Studies, Society for Financial Studies, vol. 23(6), pages 2374-2428, June.
    21. repec:bis:bisqtr:1709e is not listed on IDEAS
    22. Michael D. Bordo & Christopher M. Meissner, 2007. "Financial Crises, 1880-1913: The Role of Foreign Currency Debt," NBER Chapters,in: The Decline of Latin American Economies: Growth, Institutions, and Crises, pages 139-194 National Bureau of Economic Research, Inc.
    23. Christoph Rosenberg & Marcel Tirpák, 2009. "Determinants of Foreign Currency Borrowing in the New Member States of the EU," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(3), pages 216-228, August.
    24. Reinhardt, Dennis & Sowerbutts, Rhiannon, 2015. "Regulatory arbitrage in action: evidence from banking flows and macroprudential policy," Bank of England working papers 546, Bank of England.
    25. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "What caused the Asian currency and financial crisis?," Japan and the World Economy, Elsevier, vol. 11(3), pages 305-373, October.
    26. repec:wil:wileco:2013-20 is not listed on IDEAS
    27. Romain Ranciere & Aaron Tornell & Athanasios Vamvakidis, 2010. "A New Index of Currency Mismatch and Systemic Risk," IMF Working Papers 10/263, International Monetary Fund.
    28. Beirne, John & Friedrich, Christian, 2017. "Macroprudential policies, capital flows, and the structure of the banking sector," Journal of International Money and Finance, Elsevier, vol. 75(C), pages 47-68.
    29. Martin Brown & Ralph De Haas, 2012. "Foreign banks and foreign currency lending in emerging Europe," Economic Policy, CEPR;CES;MSH, vol. 27(69), pages 57-98, January.
    30. Michael Chui & Ingo Fender & Vladyslav Sushko, 2014. "Risks related to EME corporate balance sheets: the role of leverage and currency mismatch," BIS Quarterly Review, Bank for International Settlements, September.
    31. Stefan Avdjiev & Cathérine Koch & Patrick McGuire & Goetz von Peter, 2017. "International Prudential Policy Spillovers: A Global Perspective," International Journal of Central Banking, International Journal of Central Banking, vol. 13(2), pages 5-33, March.
    32. Wenxin Du & Jesse Schreger, 2016. "Sovereign Risk, Currency Risk, and Corporate Balance Sheets," Harvard Business School Working Papers 17-024, Harvard Business School.
    33. Forbes, Kristin J. & Warnock, Francis E., 2012. "Capital flow waves: Surges, stops, flight, and retrenchment," Journal of International Economics, Elsevier, vol. 88(2), pages 235-251.
    34. Ahnert, Toni & Forbes, Kristin & Friedrich, Christian & Reinhardt, Dennis, 2018. "Macroprudential FX Regulations: Shifting the Snowbanks of FX Vulnerability?," CEPR Discussion Papers 12766, C.E.P.R. Discussion Papers.
    35. Atish R. Ghosh & Mahvash S Qureshi & Naotaka Sugawara, 2014. "Regulating Capital Flows at Both Ends; Does it Work?," IMF Working Papers 14/188, International Monetary Fund.
    36. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    37. Brown, M. & Kirschenmann, K. & Ongena, S., 2009. "Foreign Currency Loans - Demand or Supply Driven?," Discussion Paper 2009-78, Tilburg University, Center for Economic Research.
    38. Galindo, Arturo & Panizza, Ugo & Schiantarelli, Fabio, 2003. "Debt composition and balance sheet effects of currency depreciation: a summary of the micro evidence," Emerging Markets Review, Elsevier, vol. 4(4), pages 330-339, December.
    39. Lorena Keller, 2018. "Prudential Capital Controls and Risk Misallocation: Bank Lending Channel," 2018 Meeting Papers 129, Society for Economic Dynamics.
    40. Michael D. Bordo & Christopher M. Meissner, 2005. "The Role of Foreign Currency Debt in Financial Crises: 1880-1913 vs. 1972-1997," NBER Working Papers 11897, National Bureau of Economic Research, Inc.
    41. Ambrogio Cesa‐Bianchi & Luis Felipe Cespedes & Alessandro Rebucci, 2015. "Global Liquidity, House Prices, and the Macroeconomy: Evidence from Advanced and Emerging Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S1), pages 301-335, March.
    42. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    43. Efraim Benmelech, 2012. "An Empirical Analysis of the Fed's Term Auction Facility," NBER Working Papers 18304, National Bureau of Economic Research, Inc.
    44. Michael Chui & Emese Kuruc & Philip Turner, 2016. "A new dimension to currency mismatches in the emerging markets - non-financial companies," BIS Working Papers 550, Bank for International Settlements.
    45. Luc Laeven & Fabián Valencia, 2013. "Systemic Banking Crises Database," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(2), pages 225-270, June.
    46. Heedon Kang & Francis Vitek & Rina Bhattacharya & Phakawa Jeasakul & Sònia Muñoz & Naixi Wang & Rasool Zandvakil, 2017. "Macroprudential Policy Spillovers; A Quantitative Analysis," IMF Working Papers 17/170, International Monetary Fund.
    47. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    48. Horacio A Aguirre & Gastón Repetto, 2017. "Capital and currency-based macroprudential policies: an evaluation using credit registry data," BIS Working Papers 672, Bank for International Settlements.
    49. Giovanni Dell'Ariccia & Pau Rabanal & Christopher W. Crowe & Deniz O Igan, 2011. "Policies for Macrofinancial Stability; Options to Deal with Real Estate Booms," IMF Staff Discussion Notes 11/02, International Monetary Fund.
    50. Ostry, Jonathan D. & Ghosh, Atish R. & Chamon, Marcos & Qureshi, Mahvash S., 2012. "Tools for managing financial-stability risks from capital inflows," Journal of International Economics, Elsevier, vol. 88(2), pages 407-421.
    51. Erlend Nier & Luis Ignacio Jácome & Jacek Osinski & Pamela Madrid, 2011. "Towards Effective Macroprudential Policy Frameworks; An Assessment of Stylized Institutional Models," IMF Working Papers 11/250, International Monetary Fund.
    52. Shekhar Aiyar & Charles W. Calomiris & Tomasz Wieladek, 2014. "Does Macro‐Prudential Regulation Leak? Evidence from a UK Policy Experiment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(s1), pages 181-214, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ahnert, Toni & Forbes, Kristin & Friedrich, Christian & Reinhardt, Dennis, 2018. "Macroprudential FX Regulations: Shifting the Snowbanks of FX Vulnerability?," CEPR Discussion Papers 12766, C.E.P.R. Discussion Papers.
    2. Lorena Keller, 2018. "Prudential Capital Controls and Risk Misallocation: Bank Lending Channel," 2018 Meeting Papers 129, Society for Economic Dynamics.
    3. Előd Takáts & Judit Temesvary, 2019. "How does the interaction of macroprudential and monetary policies affect cross-border bank lending?," BIS Working Papers 782, Bank for International Settlements.

    More about this item

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:25083. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.