Alert May 21, 2013

OFR Issues Working Paper that Examines History of Cyclical Macroprudential Policy in U.S.

The Office of Financial Research (the “OFR”) of the U.S. Department of the Treasury released a white paper authored by Douglas J. Elliott of the Brookings Institute, Greg Feldberg of the OFR and Andreas Lehnert of the FRB (the “Authors”) which the Authors state provides the first comprehensive survey and historic narrative concerning how macroprudential policies have been used in the U.S. “to constrain the build-up of risks in financial markets, for example, by dampening credit-fueled asset bubbles.”  The Authors explain that in speaking of macroprudential policies they are focusing on those polices used to control credit growth and are addressing policy tools used to manage factors that could endanger the financial system as a whole, rather than microprudential policies, which are designed to regulate individual financial institutions.

The Authors divide macroprudential tools into two groups and they examine their respective historic use in the U.S.  The first group includes tools affecting demand for credit: (1) loan-to-value ratios; (2) margin requirements; (3) loan maturities; and (4) tax policies and incentives.  The second group of tools examined by the Authors affect the supply of credit and include: (1) lending rate ceilings; (2) interest rate ceilings; (3) reserve requirements; (4) capital requirements; (5) portfolio requirements; and (6) supervisory pressure.  The Authors provide what they describe as “very preliminary statistical analyzes of the effectiveness of [the application of various macroprudential policies].”  The Authors state that these preliminary analyses suggest that macroprudential tightening lowers the level of consumer debt; but macroprudential easing does not appear to increase the level of consumer debt.