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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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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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description	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.
doi_str_mv	10.1016/j.jfineco.2020.10.005
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source	International Bibliography of the Social Sciences (IBSS); ScienceDirect Journals
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
title	Macroprudential FX regulations: Shifting the snowbanks of FX vulnerability?
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