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Capital Adequacy Regulations in Hungary: Did It Really Matter?

Author

Listed:
  • Dóra Siklós

    (European Stability Mechanism)

Abstract
The main purpose of this paper is twofold. First, it aims to estimate the effect of the tightening of regulatory capital requirements on the real economy during a credit upswing. Second, it intends to show whether applying a countercyclical capital buffer measure, as per the Basel III rules, could have helped decelerate FX lending growth in Hungary, mitigating the build-up of vulnerabilities in the run-up to the global financial crisis. To answer these questions, we use a Vector Autoregression-based approach to understand how shocks affected to capital adequacy in the pre-crisis period. Our results suggest that regulatory authorities could have slowed the increase in lending temporarily. They would not, however, have been able to avoid the upswing in FX lending by requiring countercyclical capital buffers even if such a tool had been available and they had reacted quickly to accelerating credit growth. Our results also suggest that a more pronounced tightening might have reduced FX lending substantially, but at the expense of real GDP growth. The reason is that an unsustainable fiscal policy led to a trade-off between economic growth and the build-up of new vulnerabilities in the form of FX lending.

Suggested Citation

  • Dóra Siklós, 2016. "Capital Adequacy Regulations in Hungary: Did It Really Matter?," Working Papers 11, European Stability Mechanism.
    • Handle: RePEc:stm:wpaper:11
    as

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    File URL: https://www.esm.europa.eu/sites/default/files/document/wp11complete.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    FX lending; capital adequacy; bank regulation; counterfactual analysis;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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