Changes in Prudential Policy Instruments - A New Cross-Country Database

Abstract

This paper documents the features of a new database that focuses on changes in the intensity in the usage of several widely used prudential tools, taking into account both macro-prudential and microprudential objectives. The database coverage is broad, spanning 64 countries, and with quarterly data for the period 2000Q1 through 2014Q4. The five types of prudential instruments in the database are: capital buffers, interbank exposure limits, concentration limits, loan to value (LTV) ratio limits, and reserve requirements. A total of nine prudential tools are constructed since some useful further decompositions are presented, with capital buffers divided into four sub-indices: general capital requirements, real state credit specific capital buffers, consumer credit specific capital buffers, and other specific capital buffers; and with reserve requirements divided into two sub-indices: domestic currency capital requirements and foreign currency capital requirements. While general capital requirements have the most changes from the cross-country perspective, LTV ratio limits and reserve requirements have the largest number of tightening and loosening episodes. We also analyze the instruments' usage in relation to the evolution of key variables such as credit, policy rates, and house prices, finding substantial differences in the patterns of loosening or tightening of instruments in relation to business and financial cycles.

Foreign exchange intervention: A new database

“…The reported share of intervening central banks is estimated using the news-based proxy created in this paper. Capital controls and cumulative macroprudential policy index come from Fernández et al (2016) and Cerutti et al (2017a), respectively. These are rescaled as described in the text.…”

“…Some papers particularly relevant for us highlight the beneficial role of macroprudential policies in managing international capital flows, such as Korinek (2018). Cerutti et al (2017a) provide the broadest documentation of macroprudential policies with 64 countries covered at quarterly frequency and find that these policies are generally able to impact credit growth. Aside from those studies which discuss the usefulness of macroprudential regulation to stabilize the economy (and the financial sector in particular), such as Jeanne and Korinek (2017), only a few studies consider FX transactions.…”

“…In our paper, we rely on a database which offers large coverage across countries, instruments, and over time, which is provided by Cerutti et al (2017a), spanning the years 2000-2014 at the quarterly frequency for 64 countries. The definition of macroprudential policies is taken from Cerutti et al (2017aCerutti et al ( , 2017b and is a measure of the intensity of macroprudential policy: it adds up the number of measures that are taken in defined categories. A quarter-on-quarter change can then take values 1, 0, and -1, indicating increasing, stable and decreasing macroprudential policies.…”

“…The second reason for the weak correlation in the full sample is the broad set of policies that fall under the umbrella term macroprudential policies. The database of Cerutti et al (2017a) distinguishes ten different macropruden-tial policy instruments. Of these, only the two instruments of reserve requirements for foreign currency loans and locally denominated loans are both significantly and strongly related to FX intervention across countries, regimes and time (see Table 5, columns 7 and 8).…”

“…Figure 5: Foreign exchange intervention, capital controls, and changes in macroprudential policies over time This figure compares estimates for the use of foreign exchange interventions, capital controls and macroprudential policies.The reported share of intervening central banks is estimated using the news-based proxy created in this paper. Capital controls and cumulative macroprudential policy index come fromFernández et al (2016) andCerutti et al (2017a), respectively. These are rescaled as described in the text.…”