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Capital Adequacy Regulations in Hungary: Did It Really Matter?

Author

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  • Dóra Siklós

    (European Stability Mechanism)

Abstract

The main purpose of this paper is twofold. First, it aims to estimate the effect of the tightening of regulatory capital requirements on the real economy during a credit upswing. Second, it intends to show whether applying a countercyclical capital buffer measure, as per the Basel III rules, could have helped decelerate FX lending growth in Hungary, mitigating the build-up of vulnerabilities in the run-up to the global financial crisis. To answer these questions, we use a Vector Autoregression-based approach to understand how shocks affected to capital adequacy in the pre-crisis period. Our results suggest that regulatory authorities could have slowed the increase in lending temporarily. They would not, however, have been able to avoid the upswing in FX lending by requiring countercyclical capital buffers even if such a tool had been available and they had reacted quickly to accelerating credit growth. Our results also suggest that a more pronounced tightening might have reduced FX lending substantially, but at the expense of real GDP growth. The reason is that an unsustainable fiscal policy led to a trade-off between economic growth and the build-up of new vulnerabilities in the form of FX lending.

Suggested Citation

  • Dóra Siklós, 2016. "Capital Adequacy Regulations in Hungary: Did It Really Matter?," Working Papers 11, European Stability Mechanism.
  • Handle: RePEc:stm:wpaper:11
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    File URL: https://www.esm.europa.eu/sites/default/files/wp_11.pdf
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    References listed on IDEAS

    as
    1. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    2. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    3. Renée Fry & Adrian Pagan, 2011. "Sign Restrictions in Structural Vector Autoregressions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 938-960, December.
    4. Bridges, Jonathan & Gregory, David & Nielsen, Mette & Pezzini, Silvia & Radia, Amar & Spaltro, Marco, 2014. "The impact of capital requirements on bank lending," Bank of England working papers 486, Bank of England.
    5. Attila Csajbók & András Hudecz & Bálint Tamási, 2010. "Foreign currency borrowing of households in new EU member states," MNB Occasional Papers 2010/87, Magyar Nemzeti Bank (Central Bank of Hungary).
    6. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    7. Christoph B. Rosenberg & Marcel Tirpák, 2008. "Determinants of Foreign Currency Borrowing in the New Member States of the EU," IMF Working Papers 08/173, International Monetary Fund.
    8. Judit Páles & Dániel Homolya, 2011. "Developments in the costs of external funds of the Hungarian banking sector," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 6(3), pages 61-69, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    FX lending; capital adequacy; bank regulation; counterfactual analysis;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • 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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