Macroprudential FX Regulations: Shifting the Snowbanks of FX Vulnerability?

64 Pages Posted: 6 Mar 2018

See all articles by Toni Ahnert

Toni Ahnert

European Central Bank, Financial Research Division; Centre for Economic Policy Research (CEPR); Systemic Risk Centre - LSE; Halle Institute for Economic Research

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Dennis Reinhardt

Bank of England

Multiple version iconThere are 4 versions of this paper

Date Written: March 2018

Abstract

Can macroprudential foreign exchange (FX) regulations on banks reduce the financial and macroeconomic vulnerabilities created by borrowing in foreign currency? To evaluate the effectiveness and unintended consequences of macroprudential FX regulation, we develop a parsimonious model of bank and market lending in domestic and foreign currency and derive four predictions. We confirm these predictions using a rich dataset of macroprudential FX regulations. These empirical tests show that FX regulations: (1) are effective in terms of reducing borrowing in foreign currency by banks; (2) have the unintended consequence of simultaneously causing firms to increase FX debt issuance; (3) reduce the sensitivity of banks to exchange rate movements, but (4) are less effective at reducing the sensitivity of corporates and the broader financial market to exchange rate movements. As a result, FX regulations on banks appear to be successful in mitigating the vulnerability of banks to exchange rate movements and the global financial cycle, but partially shift the snowbank of FX vulnerability to other sectors.

Keywords: Banking flows, FX regulations, International debt issuance, macroprudential policies

JEL Classification: F32, F34, G15, G21, G28

Suggested Citation

Ahnert, Toni and Forbes, Kristin J. and Reinhardt, Dennis, Macroprudential FX Regulations: Shifting the Snowbanks of FX Vulnerability? (March 2018). CEPR Discussion Paper No. DP12766, Available at SSRN: https://ssrn.com/abstract=3134417

Toni Ahnert (Contact Author)

European Central Bank, Financial Research Division ( email )

ECB Tower
Sonnemannstraße 20
Frankfurt am Main

HOME PAGE: http://toniahnert.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Systemic Risk Centre - LSE ( email )

London
United Kingdom

Halle Institute for Economic Research ( email )

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D-06017 Halle, 06108
Germany

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Room E62-416
Cambridge, MA 02142
United States
617-253-8996 (Phone)

HOME PAGE: http://web.mit.edu/kjforbes/www

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Dennis Reinhardt

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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