Short-term impacts and interaction of macroprudential policy tools
Shaun de Jager, Riaan Ehlers, Keabetswe Mojapelo and Pieter Pienaar
Last Modified Date:
2021-12-08, 10:21 AM
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We develop a large macro-econometric model with a detailed financial block to study the impacts of changes to capital requirements and the loan-to-value (LTV) ratio on key economic and financial indicators. The model dynamics reflect the relationships between bank capital, risk-taking behaviour of the financial sector, lending spreads and economic activity. The results show that an increase in the capital adequacy ratio (CAR) raises the banks’ effective lending spreads and leads to a decline in economic activity. Similarly, a decrease in the LTV ratio has a strong negative impact on wealth and household consumption and a smaller impact on investment expenditure. Our analysis shows a strong interaction between the different macroprudential tools. Changes to capital requirements and the LTV ratio affect the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR). This can significantly amplify the economic and financial impacts of macroprudential policy, and in some cases become a source of financial instability. Effective use of macroprudential policy tools requires an understanding of how the different tools individually (and jointly) affect economic activity and financial behaviour as well as the transmission of other macroeconomic policies.