Macroprudential policy for consumer lending: Two regulatory approaches

Introduction. Since 2023, Russia has had two types of macroprudential policy for unsecured consumer lending: risk-weight add-ons policy and macroprudential limits policy. Although two policies use different terms, their scope of application is the same. The purpose of the work is to identify the features of two types of policy, their interaction, if any, and duplication of their functions. Materials and Methods. A nonlinear dynamic partial equilibrium model for heterogeneous borrowers and simulation calculations are the research tools. The trajectories in partial equilibrium, as well as the changes in average values and volatility of some macroeconomic variables are analyzed. Results. The proposed model of borrowers’ behavior reconciles empirical facts and theory: individual income growth decreases the number of individual loans, while aggregated income growth increases the number of loans, which is consistent with statistics. A tighter risk-weight add-ons policy lowers loan volatility and increases the propensity of borrowers to repay their debt. The policy of macroprudential limits decreases average debt, increases average consumption, while the borrowers recover from their individual crises earlier and are more likely not to repay their debt. It is noted that welfare theory admits that the macroprudential limits policy can be reasonably applied to irrational agents. Conclusions. The two types of macroprudential policy have their own logic and mechanisms that affect economic indicators differently. At the same time, each policy is shown to weaken the impact of the other policy: the macroprudential limits policy loses its scope for action as the risk-weight add-ons policy tightens, and the risk-weight add-ons policy loses its effectiveness for loans under the limits policy.