Effects of credit restrictions in the Netherlands and lessons for macroprudential policy: 1960s-1990s

Effects of credit restrictions in the Netherlands and lessons for macroprudential policy. Gabriele Galati, Jan Kakes and Richhild Moessner. BIS Working Papers, No 872, July 20 2020. https://www.bis.org/publ/work872.htm

Focus: Macroprudential instruments, which play a key role in the current policy debate, have a long history. Some of the tools in current use originated as monetary policy instruments that were deployed in order to influence the credit supply. For example, the Netherlands used credit restrictions as a monetary policy instrument from the 1960s to the early 1990s. We study the effects of these credit restrictions on the balance sheet structure of banks and other financial institutions.

Contribution: Our contribution is to study the effects of credit restrictions on the balance sheet structure of banks and non-bank financial institutions. We analyse the effects separately for different types of bank - commercial banks, cooperatives, saving banks and mortgage banks - and institutional investors, since credit restrictions were not applied uniformly across different types of financial institution. This lets us compare "treated" with "untreated" institutions. We can also investigate to what extent credit controls led to leakages through cross-sectoral substitution and regulatory arbitrage.

Findings: We find that banks responded to credit restrictions by switching to long-term funding with a view to facilitating credit supply while still meeting the restrictions. Most categories of lending were not affected by credit controls and some even increased following the implementation of restrictions. Arguably, the restrictions were effective in reaching their main goal, ie containing money growth. Our results also suggest that the credit restrictions contributed to financial stability by making Dutch financial institutions more reliant on stable sources of funding.

Abstract: Credit restrictions were used as a monetary policy instrument in the Netherlands from the 1960s to the early 1990s. We study the effects of credit restrictions being active on the balance sheet structure of banks and other financial institutions. We find that banks mainly responded to credit restrictions by making adjustments to the liability side of their balance sheets, particularly by increasing the proportion of long-term funding. Responses on the asset side were limited, while part of the banking sector even increased lending after the installment of a restriction. These results suggest that banks and financial institutions responded by switching to long-term funding to meet the restriction and shield their lending business. Arguably, the credit restrictions were therefore still effective in reaching their main goal, i.e. containing money growth.

JEL classification: E42, E51, E52, E58, G28
Keywords: credit restrictions, monetary policy, macroprudential policy