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Reducing Risks in Asia with Macroprudential Policies

From iMFdirect by Edda Zoli:

Booming real estate markets, rapid credit growth and—at least before the Fed’s tapering announcement last year—sustained capital inflows have raised financial stability challenges across many parts of Asia. To address them, policymakers have increasingly made use of macroprudential policies that address the stability of the financial system as a whole rather than that of individual institutions. In some cases they have also resorted to capital flow management measures to counter large capital inflows.

As new analysis in the IMF Asia and Pacific Department’s latest Regional Economic Outlook finds, macroprudential policies, especially measures related to the housing market, have helped mitigate the buildup of financial risks in Asia. In the event of sharp decreases in credit and asset prices going forward, however, it may become useful to ease certain of these measures to avoid excessive deleveraging.

Macroprudential policies more extensively used in Asia than elsewhere

While macroprudential measures have become more widespread around the world, Asia stands out. In particular, many economies in the region have been heavy users of housing‑related measures, especially caps on loan-to-value ratios (the ratio between the size of the mortgage loan and the value of the house being purchased). Indeed, since 2000 tightening of loan-to-value ratios has occurred more than twice as often in Asia as it has in Central and Eastern Europe/Community of Independent States, advanced Europe, and North America.


figure one


Likewise, while macroprudential policies have generally become more stringent over time in all regions, this has been most striking in Asia. They were most heavily tightened in the pre‑crisis boom period during 2006–07, and then again after the crisis as capital flowed back into the region and asset prices soared.


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