Assessing the Effects of Macroprudential Policy Measures in Korea

This paper presents a tentative empirical assessment of the impacts of two macroprudential measures introduced in Korea since 2010 - the leverage cap on banks' FX derivative positions (leverage cap) and the levy on banks' non-deposit foreign currency liabilities (macroprudential levy). These measures, introduced as alternative macroprudential policy tools to mitigate the volatile cross-border banking flows, entail imposing banks disincentives to the high reliance on short-term foreign borrowings, which proved to highly destabilizing in the wake of the global financial crisis. We attempt to gauge these impacts by estimating Bayesian VAR models of banks' foreign borrowings using the data over the period 2003-2011, and then quantifying the effects of these macroprudential measures on banks' foreign borrowings through counterfactual analysis based on conditional forecasts. Our empirical results suggest that both macroprudential measures have contributed to boosting resilience in the banking system, in that they have lengthened the maturity structure of banks' foreign liabilities. First, the estimates from the models for banks as a whole show that the leverage cap reduced short-term foreign borrowings more than long-term foreign borrowings. Second, the estimates using the models for domestic banks and foreign bank branches show that the macroprudential levy reduced banks' short-term foreign borrowings mainly, leaving their long-term borrowings almost unaffected. Taken together, our results suggest that both the leverage cap and the macroprudential levy have helped to mitigate the vulnerabilities associated with procyclical capital flows, because of their abilities to reduce maturity mismatches in the banking system. However, since the analysis in this paper is based upon limited data from the initial period of new policy measure implementation, it is possible that the results could change as more data become available over time. Nevertheless, this kind of model-based analysis helps to provide a tentative overview of the impacts of the new macroprudential policies, which could serve as a starting point for future policy analysis.