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Calibrating macroprudential policy

Listed author(s):
  • Iana Liadze

    ()

  • Ray Barrell

    ()

  • Professor E. Philip Davis

    ()

Policy proposals on the new international standards for bank capital and liquidity are being debated without any methodical evaluation of their effects on both crisis probabilities and concurrent social costs. Using data for 14 OECD economies for the years 1980 Ð 2007, we conduct a systematic evaluation of crisis determinants and find that bank capital adequacy, liquidity, the current account deficit and changes in house prices are the principal factors associated with OECD banking crises. There is no evidence of procyclical risks being generated by credit or GDP growth. We explicitly quantify the regulatory changes to capital and liquidity that would be required in each OECD economy over time in order to ensure systemic stability. We show that an international consensus on regulatory changes will generate 'winners' and 'losers' in terms of capital and liquidity adjustments, and we suggest that raising capital and liquidity by 4 percentage points of total assets across the board will reduce the average probability of a financial crisis to around 1%. Our results have important implications for the next generation of international banking regulations.

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File URL: http://www.niesr.ac.uk/sites/default/files/publications/dp354_0.pdf
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Paper provided by National Institute of Economic and Social Research in its series NIESR Discussion Papers with number 354.

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Date of creation: Apr 2010
Handle: RePEc:nsr:niesrd:2616
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Web page: http://niesr.ac.uk

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," American Economic Review, American Economic Association, vol. 99(2), pages 466-472, May.
  2. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  3. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(3), pages 291-299, September.
  4. Douglas W. Diamond & Raghuram G. Rajan, 2009. "The Credit Crisis: Conjectures about Causes and Remedies," American Economic Review, American Economic Association, vol. 99(2), pages 606-610, May.
  5. Sylvia Kaufmann & Maria Teresa Valderrama, 2010. "The Role Of Credit Aggregates And Asset Prices In The Transmission Mechanism: A Comparison Between The Euro Area And The Usa," Manchester School, University of Manchester, vol. 78(4), pages 345-377, July.
  6. Goodhart, Charles, 2005. "The interest rate conditioning assumption," LSE Research Online Documents on Economics 24666, London School of Economics and Political Science, LSE Library.
  7. Sushil Wadhwani, 2008. "Should Monetary Policy respond to Asset Price Bubbles? Revisiting the Debate," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  8. Lars Jonung, 2008. "Lessons from Financial Liberalisation in Scandinavia," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 50(4), pages 564-598, December.
  9. Ray Barrell & E Philip Davis & Tatiana Fic & Dawn Holland & Simon Kirby & Iana Liadze, 2009. "Optimal Regulation of Bank Capital and Liquidity: How to Calibrate New International Standards," Occasional Papers 38, Financial Services Authority.
  10. Martin Cihak, 2006. "How Do Central Banks Writeon Financial Stability?," IMF Working Papers 06/163, International Monetary Fund.
  11. Demirguc-Kunt, Asli & Detragiache, Enrica & Gupta, Poonam, 2006. "Inside the crisis: An empirical analysis of banking systems in distress," Journal of International Money and Finance, Elsevier, vol. 25(5), pages 702-718, August.
  12. Charles Goodhart, 2005. "The Interest Rate Conditioning Assumption," FMG Discussion Papers dp547, Financial Markets Group.
  13. Barrell, Ray & Davis, E. Philip & Karim, Dilruba & Liadze, Iana, 2010. "Bank regulation, property prices and early warning systems for banking crises in OECD countries," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2255-2264, September.
  14. Sushil Wadhwani, 2008. "Should Monetary Policy Respond To Asset Price Bubbles? Revisiting the Debate," National Institute Economic Review, National Institute of Economic and Social Research, vol. 206(1), pages 25-34, October.
  15. Viral V. Acharya & Hyun Song Shin & Tanju Yorulmazer, 2011. "Crisis Resolution and Bank Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 2166-2205.
  16. Ray Barrell & E. Philip Davis, 2007. "Financial Liberalisation, Consumption And Wealth Effects In Seven Oecd Countries," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(2), pages 254-267, May.
  17. Casey Mulligan & Luke Threinen, 2008. "Market Responses to the Panic of 2008," NBER Working Papers 14446, National Bureau of Economic Research, Inc.
  18. Asli Demirgüç-Kunt & Enrica Detragiache, 1998. "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 81-109, March.
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