Macroprudential Policy and Financial Stability: An Empirical Analysis
Hyttinen, Aaro (2024)
Hyttinen, Aaro
2024
Kauppatieteiden maisteriohjelma - Master's Programme in Business Studies
Johtamisen ja talouden tiedekunta - Faculty of Management and Business
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Hyväksymispäivämäärä
2024-09-03
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:tuni-202408278341
https://urn.fi/URN:NBN:fi:tuni-202408278341
Tiivistelmä
The financial crisis of 2007-2008 exposed several weaknesses in the earlier regulatory framework aimed at ensuring the stability of the financial system. This ignited conversation around the stability of the financial system and the effectiveness of the regulation known as macroprudential policy, leading to the development of the latest macroprudential regulatory framework, Basel III. 12 years later in 2020, another financial crisis, initiated by the Covid-19 pandemic, resurfaced the topic around the effectiveness of macroprudential policy in promoting the stability of the financial system.
The financial system plays an important role in the economy as it facilitates the allocation of excess capital. When the financial system is stable, the allocation of capital happens efficiently and without disruptions, promoting stable economic growth and welfare. The systemic risks that undermine the stability of the financial system, in turn, trigger crises, facilitate their contagion and lead to the decline in welfare and a slowdown in economic growth. Macroprudential policy serves as the regulatory framework designed to mitigate these systemic risks, and it is typically conducted with different types of macroprudential policy tools.
This thesis studies the effectiveness of macroprudential policy. By employing a fixed effects method, seventeen different macroprudential tools individually, in groups and across advanced and emerging economies were analyzed based on how they suppressed indicators that signal the buildup of systemic risk in the financial system. These indicators were credit growth, asset price growth and house price growth.
The results from the empirical study conducted in this thesis suggest that some macroprudential policy tools such as loan-to-value ratios (LTV), foreign currency lending restrictions (LFC) and countercyclical capital buffers (CCB) were able to limit the growth in credit and asset prices, likely indicating effectiveness at suppressing rapid growth in these indicators and therefore at promoting financial stability. However, macroprudential policy, in general and on average, was not found to be effective. Statistically significant differences between advanced and emerging economies were also discovered: macroprudential policy appeared to be more effective in emerging than in advanced economies.
The financial system plays an important role in the economy as it facilitates the allocation of excess capital. When the financial system is stable, the allocation of capital happens efficiently and without disruptions, promoting stable economic growth and welfare. The systemic risks that undermine the stability of the financial system, in turn, trigger crises, facilitate their contagion and lead to the decline in welfare and a slowdown in economic growth. Macroprudential policy serves as the regulatory framework designed to mitigate these systemic risks, and it is typically conducted with different types of macroprudential policy tools.
This thesis studies the effectiveness of macroprudential policy. By employing a fixed effects method, seventeen different macroprudential tools individually, in groups and across advanced and emerging economies were analyzed based on how they suppressed indicators that signal the buildup of systemic risk in the financial system. These indicators were credit growth, asset price growth and house price growth.
The results from the empirical study conducted in this thesis suggest that some macroprudential policy tools such as loan-to-value ratios (LTV), foreign currency lending restrictions (LFC) and countercyclical capital buffers (CCB) were able to limit the growth in credit and asset prices, likely indicating effectiveness at suppressing rapid growth in these indicators and therefore at promoting financial stability. However, macroprudential policy, in general and on average, was not found to be effective. Statistically significant differences between advanced and emerging economies were also discovered: macroprudential policy appeared to be more effective in emerging than in advanced economies.