Assessing macro-prudential policies: the case of FX lending

This paper analyzes effectiveness and side effects of pre Basel III macroprudential policy measures to reduce excessive foreign currency (FX) lending growth in Austria to the private non-financial sector. Our series of macroprudential measures were introduced in 2003, 2008, 2010 and 2013. For assessing their effectiveness, we set up a Cournot oligopoly model with two types of loans and intra-firm competition, and apply a simultaneous equation panel model to estimate the model parameters for a quarterly data set of around 750 Austrian banks from 1998 to 2016. Our results indicate that the legally binding measures starting in 2010 were more effective than previous legally non binding measures in curbing FX lending, while banks simultaneously substituting these loans with euro loans. We show that these macroprudential measures are also effective with regard to reducing the identified risks and efficiently avoid unintended negative side effects such as credit crunches.