Macroprudential policies have been the focus of increased attention in the post-crisis regulatory reform agenda. These policies are intended to limit systemic risk – the risk of disruptions to the provision of financial services caused by impairment to parts or all of the financial system (IMF 2013).
While an expanding literature has explored the effect of macroprudential policies on the aggregate economy and bank-level credit (Akinci and Olmstead-Rumsey 2017, Cerutti et al. 2015, Claessens et al. 2013), there has been little empirical evidence on the relationship between macroprudential policies and firm outcomes. Importantly, macroprudential policies might have differentiated effects across different types of firms. In particular, evidence that the ex-ante most financially constrained firms tend to be most affected by macroprudential policies could be suggestive of a trade-off between financial stability and inclusion.
Our recent research (Ayyagari et al. 2018) assesses the effectiveness of macroprudential policies and their impact on firms Specifically, using data across 900,000 firms from 49 countries for the period 2003-2011, we gauge the differential impact of macroprudential policies on small and young firms that tend to be more financially constrained to begin with and that the literature has found are more responsive to policy shocks. Our findings are important for policy formulation both in terms of the effectiveness of macroprudential policies and in terms of their unintended consequences.
Why macroprudential tools?
The case for macroprudential policies rests on the notion that a high correlation in the behaviour across financial institutions can result in contagion effects which can cause idiosyncratic distress to become systemic. In addition, strong credit cycles may have the potential not only to exacerbate business cycles, but also to lead to systemic banking distress. In the broadest sense, one can distinguish between a cross-sectional and a time-series dimension of macroprudential tools. In the cross-sectional dimension, macroprudential policies (e.g. higher capital requirements or regulatory restrictions on institutions whose failure would have a strong negative impact on the system) seek to limit the build-up of vulnerabilities that arise through linkages across financial institutions and from the critical role played by some institutions. In the time-series dimension, macroprudential policies intend to reduce systemic vulnerabilities arising from procyclical feedback between asset prices and credit and limiting unsustainable increase in leverage and volatile funding (IMF 2013). Our empirical analysis focuses on on the use of macroprudential tools to smooth credit cycles over time.
We distinguish between: (i) tools targeted at borrowers’ leverage and financial positions, and (ii) tools targeted at financial institutions using data from the Global Macroprudential Policy Instruments, as described inCerutti et al. (2015). The former includes loan-to-value and debt-service-to-income ratios, while the latter includes the following ten instruments: dynamic loan-loss provisioning, countercyclical capital buffers, bank leverage ratios, capital surcharge for systemically important financial institutions, limits on interbank exposures, concentration limits, limits on foreign currency loans, limits on domestic currency loans, reserve requirement ratios, and taxes or levies on financial institutions. We further use recent data on the intensity of macroprudential tools (Cerutti et al. 2017), as discussed below.
Data and methodology
To explore the relationship between macroprudential policies and firms’ financing, investment and sales growth, we combine the macroprudential indicators with data from Orbis, a commercial database distributed by Bureau van Dijk which contains basic firm-level information including data on external financing for over 900,000 companies across 49 countries over the period of 2003 to 2011. Compared with other databases, the unique advantage of using Orbis is that it includes data on large, small, listed and unlisted firms. We explore both short-term (with residual maturity of less than one year) and long-term (with residual maturity of one year of more) financing, as well as investment and sales growth.
There are several advantages to using micro data to examine the impact of macroprudential policies. First, using firm-level data and focusing on the differential effects of macroprudential policies across firm groups helps to mitigate endogeneity concerns regarding the adoption of macroprudential policies, as it is harder to argue that credit developments in individual firms or specific firm groups will drive the adoption of aggregate macroprudential policies. Second, by conducting the analysis at the firm level we can include country and time fixed effects to control for the impact of other macroeconomic developments (e.g. monetary policy) that might also affect firm credit growth.
We run firm-level regressions of financing, investment and sales growth on country-year indicators of macroprudential policies and control for other macroeconomic factors. We also focus on the differential relationship between macroprudential policies, financing, investment and sales growth of small and young firms relative to other firms. This allows us to control for any confounding time-varying country factors that might affect financing growth for any average firm in the country.
Our results suggest a significant association between the implementation of some macroprudential tools and firms’ financing and real sector growth, but we also find evidence of differential effects across different firm groups.
- There is a significant and negative association between borrower-targeted macroprudential policies and firms’ long-term financing growth. Specifically, applying one additional borrower-related macroprudential tool is associated with 4.8% lower long-term financing growth, while the correlation between financial-institution targeted macroprudential tools and firms’ financing growth is not significant.
- Micro, small and medium-sized firms’ as well young firms’ growth in short- and long-term financing decreases with the additional implementation of borrower-related macroprudential tools, while the association between financial institution-targeted macroprudential tools and financing growth is relatively stronger and more negative for micro firms.
- Both the implementation and intensity of macroprudential tools are significantly associated with firms’ financing growth. Both the level and the change in the loan-to-value ratio are associated with a relatively lower long-term financing growth of micro, small and medium sized enterprises, while neither short-term financing growth nor overall financing growth seem to be impacted. These findings hold both for microenterprises and small and medium enterprises, but not for young firms.
- Less financially healthy firms are more affected by the implementation of macroprudential policies. Specifically, highly levered and less profitable firms and firms with low interest coverage experience stronger reductions in financing growth than other firms after the implementation of macroprudential policies.
- Macroprudential policies are also associated with real sector outcomes. Specifically, applying one additional borrower-targeted macroprudential tool is associated with a 4.4% lower investment growth and 3.5% lower sales growth. As before, there is no significant association with financial institution-targeted macroprudential tools. The link between macroprudential tools and investment and sales growth is stronger for micro, small and medium-sized enterprises and for younger firms.
Our results show that macroprudential tools affect firms’ financing, investment and sales growth, speaking for their effectiveness. However, it is borrower-targeted policies rather than measures targeted at banks that are most effective, consistent with previous findings that macroprudential measures targeted at banks are subject to leakage (Aiyar et al. 2014).
The effectiveness of macroprudential tools works primarily through reducing financing growth for micro, small and medium-sized enterprises and young firms that have fewer alternative financing sources. However, it is the financially less healthy firms among these groups that experience a higher reduction in financing growth, thus providing limited evidence for a trade-off between financial stability and inclusion.
This finding is consistent with the literature that has found that small firms are more affected by policy changes (Forbes 2007, Gertler and Gilchrist 1994). Furthermoreit points to a trade-off between financial stability and financial inclusion. Reassuringly, however, banks seem to be reducing financing growth primarily to riskier (more financially fragile) firms.
Authors’ note: The views expressed here are those of the authors and do not necessarily represent those of the institutions with which they are affiliated.
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Akinci, O and J Olmstead-Rumsey (2017), “How effective are macroprudential policies? An empirical investigation”, Journal of Financial Intermediation 33: 33-57.
Ayyagari, M, T Beck and M S Martinez Peria (2018), “The micro impact of macroprudential policies: Firm-level evidence”, IMF working paper 18/267.
Cerutti, E, S Claessens and L Laeven (2015), “The use and effectiveness of macroprudential policies: New evidence”, IMF working paper 15/61.
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Gertler, M and S Gilchrist (1994), “Monetary policy, business cycles, and the behaviorof small manufacturing firms”, Quarterly Journal of Economics 109(2): 309-340.
IMF (2013), “Key aspects of macroprudential policy”, IMF policy paper.