Macroprudential policy as an instrument of limiting the use of short-term wholesale financing by banks
Journal Title: Zarządzanie i Finanse - Year 2013, Vol 11, Issue 2
Abstract
Paper analyses the role of macroprudential policy as an instrument for controlling banks’ use of short-term interbank loans as a source of funding their assets. There is a consensus in the literature that while macroprudential policy may improve the effectiveness and lower the costs of controlling the rate of credit growth, interest rate policy alone can still be a sufficiently effective tool of containing unstable lending booms. In our paper we argue that interest rate policy cannot be sufficiently effective instrument of containing banks’ demand for short-term wholesale financing. The reason is that short-term interbank loans are used not only for funding loans, but also for funding banks’ trading portfolios of which profitability is artificially increased by the use of high leverage and large banks access to artificially low cost of financing. Under the circumstances, using interest rate hikes for containing banks’ demand for short-term wholesale funding may expose banks to balance sheet losses due to a fall in prices of debt securities held in their trading portfolios. Thus, as far as containing the excessive use of short-term wholesale funding is concerned, the proper solution is to employ macroprudential instruments, e.g. imposing caps on leverage, increasing risk weights on trading and setting 100% cap on loans to deposits ratio. The best solution would be breaking up too big to fail banks that would eliminate their access to artificially low cost of funding that they enjoy due to involuntary implicit guarantee given them by taxpayers.
Authors and Affiliations
Andrzej Sławiński, Dobiesław Tymoczko
Keywords
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