Capital Adequacy Regulations in Hungary: Did It Really Matter?

29 Pages Posted: 13 Mar 2018

See all articles by Dora Siklos

Dora Siklos

European Stability Mechanism

Date Written: April 1, 2016

Abstract

The main purpose of this paper is twofold. First, it aims to estimate the effect of the tightening of regulatory capital requirements on the real economy during a credit upswing. Second, it intends to show whether applying a counter-cyclical capital buffer measure, as per the Basel III rules, could have helped decelerate FX lending growth in Hungary, mitigating the build-up of vulnerabilities in the run-up to the global financial crisis. To answer these questions, we use a Vector Autoregression-based approach to understand how shocks affected to capital adequacy in the pre-crisis period. Our results suggest that regulatory authorities could have slowed the increase in lending temporarily. They would not, however, have been able to avoid the upswing in FX lending by requiring counter-cyclical capital buffers even if such a tool had been available and they had reacted quickly to accelerating credit growth. Our results also suggest that a more pronounced tightening might have reduced FX lending substantially, but at the expense of real GDP growth. The reason is that an unsustainable fiscal policy led to a trade-off between economic growth and the build-up of new vulnerabilities in the form of FX lending.

Keywords: FX lending, capital adequacy, bank regulation, counterfactual analysis

JEL Classification: E58, G01, G21, G28

Suggested Citation

Siklos, Dora, Capital Adequacy Regulations in Hungary: Did It Really Matter? (April 1, 2016). European Stability Mechanism Working Paper No. 11; ISBN 978-92-95085-18-3 . Available at SSRN: https://ssrn.com/abstract=3139103 or http://dx.doi.org/10.2139/ssrn.3139103

Dora Siklos (Contact Author)

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

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