Macroprudential FX regulations: Shifting the snowbanks of FX vulnerability?

Abstract

for outstanding research assistance and to Jérôme Vandenbussche, Ursula Vogel, and Enrica Detragiache for sharing their data. The views in this paper are those of the authors and do not necessarily represent the views of any institution with which they are affiliated. cross-border bank FX borrowing by more than half. At the same time, corporates increase FX debt issuance by about 10% of median annual FX debt issuance for the full sample, equivalent to a 15%-20% increase in FX corporate debt issuance for countries such as Brazil and Indonesia. Overall, our findings inform the policy debate on macroprudential regulations and highlight the need to assess their full impact on the economy.

Structural change, productive development, and capital flows: does financial “bonanza” cause premature deindustrialization?

“…Forbes et al, (2015) reach similar conclusions by stressing that CFM policies may not prevent surges in capital inflows and exchange rate appreciations, but they can tame domestic credit booms and reduce domestic financial fragility. Ahnert et al, (2021) note that CFM tends to reduce financial sector and aggregate economy-wide exposure to exchange rate risk, even though this is partially moved to the non-financial corporate sector. Erten and Ocampo (2016) present empirical evidence according to which CFM policies can effectively restrain booms in capital inflows and mitigate macroeconomic instability once the problem of endogeneity is duly considered 19 .…”

Stress relief? Funding structures and resilience to the covid shock

“…9 Many countries adopted widespread macroprudential reforms after the 2008/9 Global Financial Crisis, such as a tightening of capital and liquidity requirements on banks, and in some cases limiting banks’ exposure to foreign currency (FX) and access to foreign capital. Evidence from the literature suggests that these reforms have made banks more resilient to shocks, including reducing their exposure to foreign currency borrowing and exchange rate movements ( Ahnert et al, 2021 ).…”

“…If the currency denomination of an entity's assets is not aligned with that of its liabilities, exchange rate fluctuations can generate sharp changes in net worth. As discussed in Ahnert et al (2021) and Shin (2013) , 14 FX exposures and currency mismatches have been long-standing vulnerabilities in the financial system, although as some countries tightened regulations on the FX exposures of banks, risks related to currency mismatches have partially shifted to non-bank financial intermediaries, such as increased US$ bond issuance by companies. Possible tools available to mitigate this vulnerability are: macroprudential FX regulations ( Ahnert et al, 2021 ); capital controls ( Keller, 2019 ); FX interventions ( Mrkaic, Kim, and Mano, 2020 ); and hedging ( Alfaro, Calani, and Varela, 2021 ).…”

Diverse Outreach of Macroprudential Policy Effect on Household and Non-Financial Corporate Loan: An Indication of Macroprudential Policy Leak?

“…As a result, while developed countries sufficiently adopt borrower-based instruments as standards such as loan to value (LTV) and debt to income ratio (DTI), emerging economies complement them with extra instruments. The complementary instruments include exchange rate-related policy to respond to exchange rate fluctuation sensitivity (Cerutti et al 2015;Ahnert et al 2021)). Another complementary feature is capital control policy to respond to systemic vulnerability due to low domestic interest rates and strong capital inflows, especially in economies with controlled exchange rates (Zhang & Zoli, 2016).…”