Do macroprudential policies affect non-bank financial intermediation?

BIS Working Papers  |  No 927  | 
11 February 2021
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Summary

Focus

The Great Financial Crisis (GFC) of 2007–09 has highlighted the limits of traditional policies in addressing the potential negative effects of credit and asset price cycles on financial stability. In response, central banks and regulators have increasingly relied on long-advocated macroprudential policies (MaPs). Together with various other post-GFC reforms, including the Basel III framework and closer supervisory oversight, MaPs have increased the resilience of banking systems around the world. However, two factors may limit the efficacy of MaPs for overall financial stability: the growth of a less regulated non-bank financial intermediation (NBFI) sector; and the possible presence of spillover effects across jurisdictions.

Contribution

Using data for 24 jurisdictions participating in the Financial Stability Board's monitoring exercise over the period 2002–17, we study how MaPs affect the size of the NBFI sector domestically and internationally. In particular, we focus on NBFI activities that may involve bank-like financial stability risks. We contribute to the literature in two ways. First, on the domestic side, we test if a tightening (easing) of MaPs is associated with an increase (decrease) in financial activities in NBFI. Second, we test for cross-country spillovers by estimating whether the use of MaPs in foreign jurisdictions affects the size of the NBFI sector domestically.

Findings

We find that a net tightening of domestic MaPs increases NBFI activities and decreases bank assets, raising the NBFI share in total financial assets. By contrast, a net tightening of MaPs in foreign jurisdictions leads to a reduction of the NBFI share – the effect of a drop of NBFI assets and an increase in banking activity domestically. When we distinguish between tightening and easing of MaPs, we observe that the effects are by and large symmetric. The effect of MaPs (domestic and foreign) is economically and statistically significant for all NBFI economic functions that may pose risks to financial stability. Our finding of the presence of externalities calls for international coordination in the development and enactment of MaPs.


Abstract

We analyse how macroprudential policies (MaPs), largely applied to banks and to a lesser extent borrowers, affect non-bank financial intermediation (NBFI). Using data for 24 of the jurisdictions participating in the Financial Stability Board's monitoring exercise over the period 2002–17, we study the effects of MaP episodes on bank assets and on those NBFI activities that may involve bank-like financial stability risks (the narrow measure of NBFI). We find that a net tightening of domestic MaPs increases these NBFI activities and decreases bank assets, raising the NBFI share in total financial assets. By contrast, a net tightening of MaPs in foreign jurisdictions leads to a reduction of the NBFI share – the effect of a drop in NBFI activities and an increase in domestic banking assets. Tightening and easing MaPs have largely symmetric effects on NBFI. We find that the effect of MaPs (both domestic and foreign) is economically and statistically significant for all those NBFI economic functions that may pose risks to financial stability.

JEL codes: G10, G21, O16, O40

Keywords: macroprudential policy, non-bank financial intermediation, shadow banking, international spillovers