Capital Adequacy Regulations in Hungary: Did it Really Matter?

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Dora Siklos
Dora Siklos
1 University of Debrecen

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The main purpose of this paper is twofold. First, it aims to estimate the effect of the tightening of regulatory capital requirements on the real economy during credit upswing. Second, it intends to show whether applying a countercyclical capital buffer measure, as per the Basel III rules,could have helped decelerate FX lending growth in Hungary, mitigating the build-up of vulnerabilities in the run-up to the global financial crisis. To answer these questions, we use a Vector Autoregression-based approach to understand how shocks affected to capital adequacy in the pre-crisis period.Our results suggest that regulatory authorities could have slowed the increase in lending temporarily.They would not, however, have been able to avoid the upswing in FX lending by requiring countercyclical capital buffers even if such a tool had been available and they had reacted quickly to accelerating credit growth. Our results also suggest that a more pronounced tightening might have reduced FX lending substantially, but at the expense of real GDP growth. The reason is that an unsustainable fiscal policy led to a trade-off between economic growth and the build-up of new vulnerabilities in the form of FX lending.

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Funding

No external funding was declared for this work.

Conflict of Interest

The authors declare no conflict of interest.

Ethical Approval

No ethics committee approval was required for this article type.

Data Availability

Not applicable for this article.

Dora Siklos. 2016. \u201cCapital Adequacy Regulations in Hungary: Did it Really Matter?\u201d. Global Journal of Human-Social Science - E: Economics GJHSS-E Volume 16 (GJHSS Volume 16 Issue E3): .

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Crossref Journal DOI 10.17406/GJHSS

Print ISSN 0975-587X

e-ISSN 2249-460X

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GJHSS-E Classification: JEL Code: E58, G01, G21, G28
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December 15, 2016

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The main purpose of this paper is twofold. First, it aims to estimate the effect of the tightening of regulatory capital requirements on the real economy during credit upswing. Second, it intends to show whether applying a countercyclical capital buffer measure, as per the Basel III rules,could have helped decelerate FX lending growth in Hungary, mitigating the build-up of vulnerabilities in the run-up to the global financial crisis. To answer these questions, we use a Vector Autoregression-based approach to understand how shocks affected to capital adequacy in the pre-crisis period.Our results suggest that regulatory authorities could have slowed the increase in lending temporarily.They would not, however, have been able to avoid the upswing in FX lending by requiring countercyclical capital buffers even if such a tool had been available and they had reacted quickly to accelerating credit growth. Our results also suggest that a more pronounced tightening might have reduced FX lending substantially, but at the expense of real GDP growth. The reason is that an unsustainable fiscal policy led to a trade-off between economic growth and the build-up of new vulnerabilities in the form of FX lending.

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Capital Adequacy Regulations in Hungary: Did it Really Matter?

Dora Siklos
Dora Siklos University of Debrecen

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