The shortsightedness of Glenn Stevens’ comments last year that macro-prudential controls on high risk mortgage lending were “dreaded” and the “latest fad” has, once again, been exposed with a new literature review from economists Kenneth N. Kuttner and the Bank for International Settlements’ Ilhyock Shim finding that macro-prudential controls are effective in combating housing bubbles and bolstering financial stability. From VOX:
Lim et al. (2011) found that reserve requirements, dynamic provisioning, maximum loan-to-value and debt-service-to-income ratios and limits on foreign currency lending had measurable effects on the growth rate or cyclicality of private sector credit. Using a sample of approximately 2,800 banks in 48 economies from 2000 to 2010, Claessens et al. (2014) showed that maximum loan-to-value and debt-service-to-income ratios as well as limits on credit growth and foreign currency lending reduce bank leverage and asset growth during booms, but that few policies help stop declines in bank leverage and assets during downturns.