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Policies for Macrofinancial Stability
This note explores the costs and benefits of different policy options to reduce the risks associated with credit booms, drawing upon several country experiences and the findings from econometric analysis.
Global Housing Cycles
Housing cycles and their impact on the financial system and the macroeconomy have become the center of attention following the global financial crisis. This paper documents the characteristics of housing cycles in a large set of countries, and examines the determinants of house price movements. Empirical analysis shows that house price dynamics are mostly driven by income and demographics but fluctuations in these fundamentals and credit conditions can create deviations from the implied equilibrium path. We conclude with a discussion of the macroeconomic implications of house price corrections.
Bank Lobbying: Regulatory Capture and Beyond
In this paper, we discuss whether and how bank lobbying can lead to regulatory capture and have real consequences through an overview of the motivations behind bank lobbying and of recent empirical evidence on the subject. Overall, the findings are consistent with regulatory capture, which lessens the support for tighter rules and enforcement. This in turn allows riskier practices and worse economic outcomes. The evidence provides insights into how the rising political power of banks in the early 2000s propelled the financial system and the economy into crisis. While these findings should not be interpreted as a call for an outright ban of lobbying, they point in the direction of a need for rethinking the framework governing interactions between regulators and banks. Enhanced transparency of regulatory decisions as well as strenghtened checks and balances within the decision-making process would go in this direction.
Does Going Tough on Banks Make the Going Get Tough? Bank Liquidity Regulations, Capital Requirements, and Sectoral Activity
Whether and to what extent tougher bank regulation weighs on economic growth is an open empirical question. Using data from 28 manufacturing industries in 50 countries, we explore the extent to which cross-country differences in bank liquidity and capital levels were related to differences in sectoral activity around the period of the global financial crisis. We find that industries which are more dependent on external finance, in countries where banks had higher liquidity and capital ratios, performed relatively better during the crisis, with regard to investment rates and the creation of new enterprises. This relationship, however, exists only for bank-based systems and emerging market economies. In the pre-crisis period, we find only a marginal link to bank capital. These findings survive a battery of robustness checks and provide some solid support for the tighter prudential measures introduced under Basel III.
The Long Shadow of the Global Financial Crisis: Public Interventions in the Financial Sector
We track direct public interventions and public holdings in 1,114 financial institutions over the period 2007–17 in 37 countries based on publicly available information. We use aggregate official data to validate this new dataset and estimate the fiscal impact of interventions, including the value of asset holdings remaining in state hands at end-2017. Direct public support to financial institutions amounted to $1.6 trillion ($3.5 trillion including guarantees), with larger amounts allocated to lower capitalized and less profitable banks. As of end-2017, only a few countries had fully divested the initial support they provided during the crisis. Public holdings were divested faster in better capitalized, more profitable, and more liquid banks, and in countries where the economy recovered faster. In countries where the government stake remained high relative to the initial intervention, private investment and credit growth were slower, financial access, depth, efficiency, and competition were worse, and financial stability improved less.
Back to Basics
This paper discusses about capitalism that is often thought of as an economic system in which private actors own and control property in accord with their interests, and demand and supply freely set prices in markets in a way that can serve the best interests of society. The essential feature of capitalism is the motive to make a profit. In a capitalist economy, capital assets—such as factories, mines, and railroads—can be privately owned and controlled, labor is purchased for money wages, capital gains accrue to private owners, and prices allocate capital and labor between competing uses. Although some form of capitalism is the basis for nearly all economies today, for much of the past century it was but one of two major approaches to economic organization. In the other, socialism, the state owns the means of production, and state-owned enterprises seek to maximize social good rather than profits.
Discerning Good from Bad Credit Booms
Credit booms are a focal point for policymakers and scholars of financial crises. Yet our understanding of how the real sector behaves during booms, and why some booms may go bad, is limited. Despite a large and growing body of literature, most of the work has focused on aggregate economic activity, and relatively little is known about which industries benefit and which suffer during these episodes. This note aims to fill this gap by analyzing disaggregated output and employment data in a large sample of advanced and emerging market economies between 1970 and 2014.
Sweden
This Selected Issues Paper on Sweden focuses on macroprudential policies in Sweden. Sweden’s banking system meets most standard measures of financial soundness. However, with its large and wholesale-dependent banking sector, high and increasing household debt, and resurgent house price growth, additional measures are needed to contain mounting financial stability risks. On the supply side, this means continuing to strengthen capital and liquidity requirements. However, theoretical and empirical evidence points to a need to also limit credit demand, including through effective steps to increase the rate of mortgage amortization. Empirical evidence suggests that demand-side measures are effective in curbing household borrowing. There is less evidence on the simultaneous use of these tools—a scenario particularly relevant for Sweden. The model also suggests that higher policy rates will impact both mortgage supply and demand. The main findings are qualitatively unchanged across different sample periods and alternative sign restrictions—for example, about the contemporaneous correlation between the monetary policy shock and output and inflation.
Panama
Panama’s extensive trade and financial linkages make it vulnerable to adverse external shocks, and this would have a sizable impact on Panama’s real activity. In the absence of monetary policy, macroprudential policy tools could usefully complement microprudential tools. A macroprudential supervisory body must possess the ability or power to collect and analyze firm-, market-, and global-level data to detect risks before they develop into full-blown crises. This study analyzes Panama’s tax structure, performance, and administration in order to identify priority areas for further strengthening
The Political Economy of Financial Regulation
Examines the law and policy of financial regulation using a combination of conceptual analysis and strong empirical research.
