Page 259 - Special Topic Session (STS) - Volume 3

STS543 Veronica B. B. et al.
Basel III capital requirements and adjustments in risk-weights as well as
provision requirement; liquidity-related instruments which address the build-
up of liquidity and foreign-exchange risks associated with lending booms.
These instruments include the liquidity coverage ratio and intraday liquidity
requirements; structural or interconnectedness instruments that aim to
address vulnerabilities from interconnectedness and limit contagion. These
include interbank exposure limits and additional loss-absorbing capacity for
systemically important banks; asset-related measures (or credit-related
instruments) that place restrictions or caps on amount that can be lent by
banks such as loan-to-value (LTV) ratio as well as administrative measures in
relation to credit or credit growth; reserve requirements imposed against bank
deposits and deposit substitutes; and currency-related instruments that place
limits on net open currency positions and foreign currency lending of banks.
The first category captures the measures that are intended to preserve
resilience of the banking system. These include capital and liquidity-based
measures as well as structural or interconnectedness measures. The second
category includes those measures that are expected to address excessive
cyclical swings. These include asset-side instruments, banks’ reserve
requirements and currency-related instruments. These two categories are then
aggregated to capture both the measures that are meant to promote
resilience of the banking system and to contain excessive cyclical movements.
Moreover, the dataset is classified into tightening and loosening measures.
Such a classification is used to verify the extent of asymmetric effects of each
type of tightening and loosening measures. This study follows the approach
by Kuttner and Shim (2013) and McDonald (2015) in estimating the magnitude
of the effectiveness of each instrument. A one year window (or a four-quarter
effect) is used to account for the most appropriate lag effects in the
implementation of a tightening or loosening of domestic macroprudential
policy. A separate index is constructed for each type of prudential instrument.
The idea is that a dummy variable is assigned to a value of positive one (1) if
all the measures are tightening; 0, otherwise. For loosening measures, a
dummy variable is assigned to a value of positive one (1) if all the measures
are loosening; or, 0 otherwise. The database includes a measure of the
intensity of implementation of prudential policy by considering the number of
times a policy is implemented. The the average of these measures is also used.
The study compiles data on the use of domestic prudential instruments.
The database shows that majority of the macroprudential measures
implemented from 2002 to the fourth quarter of 2017 were currency
instruments (41.8% of total), followed by capital-based instruments (29.5%),
liquidity-based instruments (13.1%), asset-side instruments (6.1%), and
interconnectedness instruments (1.2%). During the same period, a total of 108
tightening measures and 102 loosening measures were recorded. Thirty-four

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