How Could Macroprudential Policy Affect Financial System Resilience and Credit? Lessons from the Literature

Posted: 19 May 2013

See all articles by Julia Giese

Julia Giese

Bank of England

Benjamin Nelson

Bank of England

Misa Tanaka

Bank of England

Nikola A. Tarashev

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: May 16, 2013

Abstract

The first, the allocation channel, operates through the constraints and incentives of financial institutions. By employing regulatory tools that affect the cost-benefit trade-offs of financial decisions, the authority would incentivise financial institutions to reallocate their resources across alternative investments. During credit booms, for example, raising the countercyclical capital buffer would help enhance resilience and could dampen excessive balance sheet expansion. Conversely, lowering this buffer during a downturn would discourage banks from excessive deleveraging, provided that the remaining capital buffer is judged to be adequate to absorb future losses with a sufficiently high probability. In a post-crisis environment, however, some banks’ pre-crisis capitalisation may prove to be insufficient to absorb losses and confidence in the sector could, as a result, be low. Low capital levels may hamper banks’ access to funding markets and, ultimately, impair bank lending. Requiring undercapitalised banks to raise their capital levels could, in such circumstances, help underpin a sustained recovery of credit growth.

Suggested Citation

Giese, Julia and Nelson, Benjamin and Tanaka, Misa and Tarashev, Nikola A., How Could Macroprudential Policy Affect Financial System Resilience and Credit? Lessons from the Literature (May 16, 2013). Bank of England Financial Stability Paper No. 21, Available at SSRN: https://ssrn.com/abstract=2266366 or http://dx.doi.org/10.2139/ssrn.2266366

Julia Giese

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Benjamin Nelson

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Misa Tanaka (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Nikola A. Tarashev

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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