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How effective is macroprudential policy during financial downturns? Evidence from caps on banks̕ leverage

Manuel Buchholz

No wp2015-7, Bank of Estonia Working Papers from Bank of Estonia

Abstract: This paper investigates the effect of a macroprudential policy instrument, caps on banks’ leverage, on domestic credit to the private sector since the Global Financial Crisis. Applying a difference-in-differences approach to a panel of 69 advanced and emerging economies over 2002–2014, we show that real credit grew after the crisis at considerably higher rates in countries which had implemented the leverage cap prior to the crisis. This stabilising effect is more pronounced for countries in which banks had a higher pre-crisis capital ratio, which suggests that after the crisis, banks were able to draw on buffers built up prior to the crisis due to the regulation. The results are robust to different choices of subsamples as well as to competing explanations such as standard adjustment to the pre-crisis credit boom

Keywords: macroprudential policies; domestic credit; financial crisis (search for similar items in EconPapers)
JEL-codes: E51 E58 G21 G28 (search for similar items in EconPapers)
Date: 2015-12-30, Revised 2015-12-30
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn and nep-mac
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