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Calibrating macroprudential policy

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  • Iana Liadze
  • Ray Barrell
  • Professor E. Philip Davis

Abstract

Policy proposals on the new international standards for bank capital and liquidity are being debated without any methodical evaluation of their effects on both crisis probabilities and concurrent social costs. Using data for 14 OECD economies for the years 1980 Ð 2007, we conduct a systematic evaluation of crisis determinants and find that bank capital adequacy, liquidity, the current account deficit and changes in house prices are the principal factors associated with OECD banking crises. There is no evidence of procyclical risks being generated by credit or GDP growth. We explicitly quantify the regulatory changes to capital and liquidity that would be required in each OECD economy over time in order to ensure systemic stability. We show that an international consensus on regulatory changes will generate 'winners' and 'losers' in terms of capital and liquidity adjustments, and we suggest that raising capital and liquidity by 4 percentage points of total assets across the board will reduce the average probability of a financial crisis to around 1%. Our results have important implications for the next generation of international banking regulations.

Suggested Citation

  • Iana Liadze & Ray Barrell & Professor E. Philip Davis, 2010. "Calibrating macroprudential policy," National Institute of Economic and Social Research (NIESR) Discussion Papers 354, National Institute of Economic and Social Research.
    • Handle: RePEc:nsr:niesrd:354
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    Cited by:

    1. Allen, Bill & Chan, Ka Kei & Milne, Alistair & Thomas, Steve, 2012. "Basel III: Is the cure worse than the disease?," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 159-166.
    2. Oriol Carreras & E Philip Davis & Rebecca Piggott, 2016. "Macroprudential tools, transmission and modelling," National Institute of Economic and Social Research (NIESR) Discussion Papers 470, National Institute of Economic and Social Research.
    3. Ashraf, Dawood & Rizwan, Muhammad Suhail & L’Huillier, Barbara, 2016. "A net stable funding ratio for Islamic banks and its impact on financial stability: An international investigation," Journal of Financial Stability, Elsevier, vol. 25(C), pages 47-57.
    4. Gabriele Galati & Richhild Moessner, 2018. "What Do We Know About the Effects of Macroprudential Policy?," Economica, London School of Economics and Political Science, vol. 85(340), pages 735-770, October.
    5. Mathias Drehmann & Kostas Tsatsaronis, 2014. "The credit-to-GDP gap and countercyclical capital buffers: questions and answers," BIS Quarterly Review, Bank for International Settlements, March.
    6. Charles A. E. Goodhart & Dimitrios P. Tsomocos, 2011. "The Role of Default in Macroeconomics," IMES Discussion Paper Series 11-E-23, Institute for Monetary and Economic Studies, Bank of Japan.
    7. Kiss, Gábor Dávid & Kosztopulosz, Andreász, 2012. "The impact of the crisis on the monetary autonomy of Central and Eastern European countries," Public Finance Quarterly, Corvinus University of Budapest, vol. 57(1), pages 28-52.

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