Would Macroprudential Regulation Have Prevented the Last Crisis?
53 Pages Posted: 7 Aug 2018
Date Written: August 3, 2018
How well equipped are today’s macroprudential regimes to deal with a re-run of the factors that led to the global financial crisis? We argue that a large proportion of the fall in US GDP associated with the crisis can be explained by two factors: the fragility of financial sector — represented by the increase in leverage and reliance on short-term funding at non-bank financial intermediaries — and the build-up in indebtedness in the household sector. We describe and calibrate the policy interventions a macroprudential regulator would wish to make to address these vulnerabilities. And we compare and contrast how well placed two prominent macroprudential regulators — the US Financial Stability Oversight Council and the UK’s Financial Policy Committee — are to implement these policy actions.
Keywords: Financial crises, macroprudential policy, leverage, short-term wholesale funding, credit crunch, household debt, aggregate demand externality, countercyclical capital buffer, loan to value ratio, loan to income ratio.
JEL Classification: G01, G21, G23, G28.
Suggested Citation: Suggested Citation