Micro costs of macro prudence

A few months ago, I was at one of the typical Productivity Hub roundtable sessions where Wellington-types mull over why something in markets isn't working the way they'd like and how they could nudge markets around to improve things.

That time, it was about why there seemed to be problems in small business access to credit. After folks went round for a while about the purported failures, I asked whether anybody had looked at whether the macroprudential rules that came in during the GFC had killed off the financing tier that some small businesses had relied on. Remember how, before the SCF collapse and bailout, there used to be lots of ads for finance companies in the papers inviting retail investment? They'd take the money, invest it across a range of things, and pay a return to the bond investors so long as they didn't tank in the interim. Doesn't much happen now.

There was an awkward silence while folks considered whether Wellington might have caused the problem they were mulling over. Then after a "Nah, nobody's checked that", folks went back to more comfortable worthy suggestions for Making Markets Work Better Through Government.

I was reminded of it in this week's VOX CEPR Policy Portal piece. And here's the underlying IMF paper:

Combining balance sheet data on 900,000 firms from 48 countries with information on the adoption of macroprudential policies during 2003-2011, we find that these policies are associated with lower credit growth. These effects are especially significant for micro, small and medium enterprises (MSMEs) and young firms that, according to the literature, are more financially constrained and bank dependent. Among MSMEs and young firms, those with weaker balance sheets exhibit lower credit growth in conjunction with the adoption of macroprudential policies, suggesting that these policies can enhance financial stability. Finally, our results show that macroprudential policies have real effects, as they are associated with lower investment and sales growth.

So macroprudential regs reduce systematic risk but also make it tough for weaker firms to get credit.

Update: And remember that RBNZ is looking for funding for more people to do prudential regulation. They need more expertise in that area. Hopefully they're looking to improve the quality rather than the quantity margin on prudential regulation.