Macroprudential FX regulations: Shifting the snowbanks of FX vulnerability?

We use a new data set on macroprudential foreign exchange (FX) regulations to evaluate their effectiveness and unintended consequences. Our results support the predictions of a model in which banks and markets lend in different currencies, but only banks can screen firm productivity. Regulations sig...

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Bibliographic Details
Published in:Journal of financial economics 2021-04, Vol.140 (1), p.145-174
Main Authors: Ahnert, Toni, Forbes, Kristin, Friedrich, Christian, Reinhardt, Dennis
Format: Article
Language:English
Subjects:
Analysis
Bank loans
Banking industry
Banks
Banks (Finance)
Business schools
Capital flows
Currency
Currency mismatch
Economic policy
Foreign exchange
Foreign exchange rates
FX regulations
Laws, regulations and rules
Macroprudential
Money
Productivity
Regulation
Research institutes
Securities markets
Vulnerability
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Summary:We use a new data set on macroprudential foreign exchange (FX) regulations to evaluate their effectiveness and unintended consequences. Our results support the predictions of a model in which banks and markets lend in different currencies, but only banks can screen firm productivity. Regulations significantly reduce bank FX borrowing, and firms respond by increasing FX debt issuance. Moreover, regulations reduce bank sensitivity to exchange rates but are less effective at reducing the sensitivity of the broader economy. Therefore, FX regulations mitigate bank vulnerability to currency fluctuations and the global financial cycle, but appear to partially shift the snowbanks of vulnerability elsewhere.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2020.10.005