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Publication Detail
BSP WPS 2019-02: Have Domestic Prudential Policies Been Effective: Insights from Bank-Level Property Loan Data

The study examines the effectiveness of domestic prudential policies in restraining growth of real bank loan commitments and in preserving the quality of bank loans in the Philippines using panel bank data regression from the first quarter of 2014 to the fourth quarter of 2017. The study introduces three novel sets of database. First, the database includes measures of tightening and loosening of domestic prudential policies in the Philippines, by instrument, such as, credit-related instruments, liquidity-related instruments, capital-related, interconnectedness instruments, changes in banksí reserve requirements against domestic deposits and deposit substitutes, and currency-related instruments. These instruments are in turn classified into those that are adopted to preserve the banking systemís resilience and to address cyclical movements. Another database documents changes in monetary policy actions using data on the Bangko Sentral ng Pilipinasí (BSP) overnight policy rate and its monetary operations rates under the Interest Rate Corridor system. The third database compiles and records the volume of loans granted by banks for new purchases of residential properties as well as the average acquisition cost of the property from the Real Property Price Index Report. Following diagnostic and robustness checks, the study reveals important findings for the BSP. First, tightening of domestic prudential policies, particularly those tightening measures meant to preserve resilience of the banking system are effective in curbing growth of real bank loan commitments to borrowers for acquiring new residential properties. Second, this study highlights the bigger negative impact of tightening prudential measures on real bank loan commitments by universal and commercial banks compared to thrift banks. Third, the share of bank deposits to total liabilities, liquidity position and capital adequacy gap are important drivers of growth in real bank loan commitments to borrowers. Fourth, restricting both instruments meant to promote resilience of banking system and to address cyclical movements limits weakening of bank loan quality, with the latter type of instruments having bigger negative impact. Fifth, tightening of domestic prudential policies varies with monetary policy conditions and over the business and financial cycles in the Philippines.

Bangko Sentral ng Pilipinas
Authors Keywords
Bayangos, Veronica, B.; De Jesus, Jeremy, L.; macroprudential policies, microprudential policy, financial stability, real estate loans;
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