Banks' leverage in foreign exchange derivatives in times of crisis: A tale of two countries

Carlos Giraldo (), Iader Giraldo, Jose Gomez-Gonzalez and Jorge Uribe

Emerging Markets Review, 2023, vol. 55, issue C

Abstract: Before the outbreak of the Global Financial Crisis, on May 6, 2007, the Colombian central bank imposed a cap on the Gross Leverage Position in Foreign Exchange Derivatives of financial intermediaries. It was the only country in the world that implemented this prudential policy. Using synthetic control methods, we construct counterfactual scenarios and show that this policy intervention, while costly in financial stability terms in the pre-GFC period, was effective in reducing Colombia's financial stability risks during the crisis. A trade-off between “calm” and “turbulent” periods emerges from our results, which should be considered when deciding on the right policy tools to use before a crisis break-out.

Keywords: PBA; Synthetic control; Macroprudential policy (search for similar items in EconPapers)
JEL-codes: E58 E63 F38 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Banks’ Leverage in Foreign Exchange Derivatives in Times of Crises: A Tale of Two Countries (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:55:y:2023:i:c:s156601412300033x

DOI: 10.1016/j.ememar.2023.101028

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