Banks’ Leverage in Foreign Exchange Derivatives in Times of Crises: A Tale of Two Countries

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

No 20541, Documentos de trabajo from FLAR

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 in implementing this prudential policy. By leveraging insights from synthetic control literature 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 taken into account when deciding on the right policy tools to use before a crisis breaks out.

Keywords: PBAsynthetic-controlmacroprudential; policy (search for similar items in EconPapers)
JEL-codes: E58 E63 F38 (search for similar items in EconPapers)
Pages: 17
Date: 2022-11-14
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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Journal Article: Banks' leverage in foreign exchange derivatives in times of crisis: A tale of two countries (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000566:020541

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