Would Macroprudential Regulation Have Prevented the Last Crisis?

Abstract

How well equipped are today’s macroprudential regimes to deal with a rerun of the factors that led to the global financial crisis? To address the factors that made the last crisis so severe, a macroprudential regulator would need to implement policies to tackle vulnerabilities from financial system leverage, fragile funding structures, and the build-up in household indebtedness. We specify and calibrate a package of policy interventions to address these vulnerabilities—policies that include implementing the countercyclical capital buffer, requiring that banks extend the maturity of their funding, and restricting mortgage lending at high loan-to-income multiples. We then assess how well placed are two prominent macroprudential regulators, set up since the crisis, to implement such a package. The US Financial Stability Oversight Council has not been designed to implement such measures and would therefore make little difference were we to experience a rerun of the factors that preceded the last crisis. A macroprudential regulator modeled on the UK’s Financial Policy Committee stands a better chance because it has many of the necessary powers. But it too would face challenges associated with spotting build-ups in risk with sufficient prescience, acting sufficiently aggressively, and maintaining political backing for its actions.

On the importance of household versus firm credit frictions in the Great Recession

“…For an early important paper on the role of firm financial frictions in amplifying the macroeconomic effects of aggregate shocks, see Cooley, Marimon, and Quadrini (2004). See also Gilchrist (2018, 2019) and Aikman et al (2019) for surveys of the evidence on the firm-side channel and models that have addressed it.…”

Evidencia sobre el impacto y la efectividad de las herramientas macroprudenciales

“…A este respecto, Altunbas et al (2018) encuentran que el uso activo de política macroprudencial reduce la probabilidad de quiebra de las entidades bancarias durante eventos sistémicos. Para el caso concreto de EE UU, Aikman et al (2019) estiman que se podrían haber evitado hasta dos terceras partes de la caída en el crecimiento económico sufrida a raíz de la crisis financiera global mediante un uso más activo de políticas macroprudenciales que hubieran contenido la acumulación de vulnerabilidades financieras durante la fase expansiva.…”

Measuring and Assessing the Impact of the Global Economic Crisis on European Real Property Market

“…It is commonly believed that Central Banks. However, most recent studies show that there is no correlation between the macroprudential policy of central banks and the occurrence of crises on the market (Aikman, Bridges, Kashyap, & Siegert, 2019;Bordo, 2018;Detken & Smets, 2004;Brunnermeier & Schnabel, 2016;De Paoli & Paustian, 2017). Crises on the real property market and their connection with and influence on economic crises have also been described in the work of Sornette and Woodard (2010), in which the authors critically discuss the macro-prudential tools applied by Central Banks (among others, unlocking credits and increasing consumption) as a reaction to the financial crisis which has occurred.…”