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Measuring the impact of prudential policy on the macroeconomy: A practical application to Basel III and other responses to the financial crisis

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  • de-Ramon, Sebastián
  • Iscenko, Zanna
  • Osborne, Matthew
  • Straughan, Michael
  • Andrews, Peter

Abstract

When financial regulators require banks to hold a higher ratio of equity capital to debt funding, banks incur short-term costs as they adjust their balance sheets and lose some of the advantages associated with their existing funding mix. They then seek to maintain post-tax income by, for example, raising lending margins. Higher lending margins tend to lower the volumes of borrowing. This creates a trade-off between the greater stability associated with a higher ratio of equity capital to debt funding and the level of economic activity in the short to medium term. While the benefits of greater stability are obviously very large, and the reduction in economic activity is very unlikely to be on a comparable scale, exploring the trade-off is not straightforward. Past work on this did not solve all of the modelling problems, nor does this paper. We do, however, report some useful developments, which may assist in calibrating policy or monitoring the impacts of judgements already made.

Suggested Citation

  • de-Ramon, Sebastián & Iscenko, Zanna & Osborne, Matthew & Straughan, Michael & Andrews, Peter, 2012. "Measuring the impact of prudential policy on the macroeconomy: A practical application to Basel III and other responses to the financial crisis," MPRA Paper 69423, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:69423
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    Cited by:

    1. de-Ramon, Sebastian J A & Francis, William & Harris, Qun, 2016. "Bank capital requirements and balance sheet management practices: has the relationship changed after the crisis?," Bank of England working papers 635, Bank of England.
    2. Marina Abramova A. & Svetlana Dubova E. & Elena Zvonova A. & Irina Larionova V. & Vladimir Maslennikov V. & М. Абрамова А. & С. Дубова Е. & Е. Звонова А. & И. Ларионова В. & В. Масленников В., 2018. "Основные направления единой государственной денежно-кредитной политики на 2018 г. и период 2019 и 2020 гг.: мнение экспертов финансового университета // Guidelines for the Single State Monetary Policy," Экономика. Налоги. Право // Economics, taxes & law, ФГОБУ "Финансовый университет при Правительстве Российской Федерации" // Financial University under The Government of Russian Federation, vol. 11(1), pages 6-19.
    3. repec:nbb:reswpp:201606-306 is not listed on IDEAS
    4. Alfredo Martin-Oliver & Sonia Ruano & Vicente Salas-Fumas, 2013. "Banks' Equity Capital Frictions, Capital Ratios, and Interest Rates: Evidence from Spanish Banks," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 183-225, March.
    5. Douglas Elliott & Andre O Santos, 2012. "Assessing the Cost of Financial Regulation," IMF Working Papers 2012/233, International Monetary Fund.
    6. Stijn Ferrari & Mara Pirovano & Pablo Rovira Kaltwasser, 2016. "Systemic risk, macroprudential policy, bank capital requirements, real estate," Working Paper Research 306, National Bank of Belgium.
    7. Francis, William, 2014. "UK deposit-taker responses to the financial crisis: what are the lessons?," Bank of England working papers 501, Bank of England.
    8. Mario Pecaric & Josip Viskovic, 2013. "The effects of prudential policy measures on financial stability in post-transition countries," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics, vol. 31(1), pages 9-34.
    9. Martin Birn & Olivier de Bandt & Simon Firestone & Matías Gutiérrez Girault & Diana Hancock & Tord Krogh & Hitoshi Mio & Donald P. Morgan & Ajay Palvia & Valerio Scalone & Michael Straughan & Arzu Ulu, 2020. "The Costs and Benefits of Bank Capital—A Review of the Literature," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 13(4), pages 1-25, April.

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    More about this item

    Keywords

    banking; capital requirements; impact assessment; macroeconomic impact;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • 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

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