Wo king pape
No embe 2022
Ca los Gi aldo
Iade Gi aldo
Jose E. Gomez-Gonzalez
Jo ge M. U ibe
Banks’ Le e age in Fo eign
Exchange De i a i es in Times
o C ises: A Tale o Two Coun ies
Ca los Gi aldo
Iade Gi aldo
Jose E. Gomez-Gonzalez
Jo ge M. U ibe
No embe 2022
*
**
***
****
Abs ac
Be o e he ou b eak o he Global Financial C isis, on May 6, 2007, he Colombian cen al bank imposed
a cap on he G oss Le e age Posi ion in Fo eign Exchange De i a i es o inancial in e media ies. I was
he only coun y in he wo ld in implemen ing his p uden ial policy. By le e aging insigh s om syn he ic
con ol li e a u e we cons uc coun e ac ual scena ios and show ha his policy in e en ion, while cos ly
in inancial s abili y e ms in he p e-GFC pe iod, was e ec i e in educing Colombia’s inancial s abili y
isks du ing he c isis. A ade-o be ween “calm” and “ u bulen ” pe iods eme ges om ou esul s, which
should be aken in o accoun when deciding on he igh policy ools o use be o e a c isis b eaks ou .
Keywo ds: PBA, syn he ic-con ol, mac op uden ial policy.
JEL: E58, E63, F38
Banks’ Le e age in Fo eign
Exchange De i a i es in Times o
C ises: A Tale o Two Coun ies
* La in Ame ican Rese e Fund | cgi aldo@ la .ne
** La in Ame ican Rese e Fund | igi aldo@ la .ne
*** Lehman College, Ci y Uni e si y o New Yo k; and, Visi ing P o esso (Summe School), Uni e sidad de La Sabana
[email p o ec ed].edu
**** Open Uni e si y o Ca alonia | [email p o ec ed]
Table o con en s
I. In oduc ion 4
II. Me hodology 6
III. Da a 8
IV. Resul s 8
V. Conclusions 14
Re e ences 16
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Banks’ Le e age in Fo eign Exchange De i a i es in Times o C ises: A Tale o Two Coun ies
Ca los Gi aldo | Iade Gi aldo | Jose E. Gomez-Gonzalez | Jo ge M. U ibe
I. In oduc ion1
We examine he e ec s o he implemen a ion o a mac op uden ial policy in Colombia on May 6, 2007, con-
sis ing o a cap on he banks’ a io o g oss exchange a e de i a i es o capi al (PBA o i s name in Spanish)
o inancial in e media ies. We analyze he e olu ion o Colombia’s inancial s abili y index cons uc ed by
UNCTAD (Bouhia e al., 2022) a e he implemen a ion o he policy, and compa e i wi h he e olu ion o a
“syn he ic Colombia” in which he PBA was no implemen ed. Compa ing he esul s wi h hose o a “placebo”
es o Mexico, in he spi i o he syn he ic con ol li e a u e (Abadie e al., 2010), we conclude ha he e ec s
o he policy can be di ided in o wo pa s: i) be ween i s implemen a ion and be o e he ou b eak o he Global
Financial C isis (GFC) in Sep embe 2008, in which he policy esul ed in a wo sening o he coun y’s inancial
s abili y condi ions and, ii) a e he c isis s a ed, in which he policy ac ed as a shield ha gene a ed a no a-
ble inc ease in e ms o s abili y compa ed o he coun e ac ual o no policy implemen a ion. In e - empo al
agg ega e gains om he policy a e posi i e om he second qua e o 2007 o he las qua e o 2010.
The GFC was a powe ul eminde ha economic agili y can de elop benea h he su ace o appa en ly
s able mac oeconomic condi ions. Ex e nal and inancial imbalances can silen ly de elop du ing pe iods o
sus ained g ow h dynamics, calling in o ques ion he adequacy o con en ional ools o moni o economic isks
and assess longe - e m inancial s abili y. While majo global c ises a e in equen , he se e e ecessions hey
gene a e en ail signi ican cos s in e ms o o egone income and pe sis en ly high unemploymen , jus i ying
e o s o de eloping be e ools and policies o assessing and gua an eeing economic esilience.
One impo an sou ce o mac oeconomic ulne abili y, especially in eme ging ma ke economies, ela es o
he ola ili y o la ge capi al lows. While hey can deli e subs an ial bene i s o coun ies, hey also ha e
he po en ial o con ibu e o he buildup o la ge imbalances and sys emic inancial isk. The ecen li e a u e
has shown ha he bene i s o capi al lows a e g ea e in coun ies in which ins i u ional a angemen s, and
inancial, mac oeconomic, and iscal policies enable hem o in e media e capi al lows sa ely (e.g., Igan e al.,
2016; Sch o h, 2016).
Many coun ies ha e ecen ly implemen ed e o ms, including he de elopmen o mac op uden ial policies,
ha a e helping o s eng hen he esilience o inancial sys ems o shocks, including hose eme ging om
he ola ili y o in e na ional capi al lows. Mac op uden ial policies, in suppo o sound mac oeconomic pol-
icies and s ong inancial supe ision and egula ion, can play an impo an ole in helping coun ies ha ness
1 The opinions in his pape a e hose o he au ho s and do no commi FLAR o i s di ec o y boa d.
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Ca los Gi aldo | Iade Gi aldo | Jose E. Gomez-Gonzalez | Jo ge M. U ibe
he bene i s o capi al lows, while educing he nega i e e ec s ela ed o hei ola ili y. This is pa icula ly
meaning ul in commodi y-dependen economies in which hese lows a e s ongly ela ed o in e na ional
commodi y p ice cycles, such as La in Ame ica and Ca ibbean coun ies.
Cen al banks ha e played a special ole in building mac op uden ial policy ools o enhancing coun y esil-
ience, especially h ough he implemen a ion o p uden ial in e na ional capi al con ol and he accumula ion o
in e na ional ese es. Howe e , while necessa y, policies o “ha ing he house in o de ” a e clea ly no enough
o s eng hening economic esilience and educing he ulne abili y o small open economies o la ge ex e nal
shocks and high capi al low ola ili y. The inc easing le el o inancial globaliza ion, which comes in hand wi h
a la ge ola ili y o economic and inancial cycles (Rod ik, 1997; Sche e and Slaugh e , 2001), demands he
de elopmen o be e insu ance mechanisms agains in e na ional shocks.
In he mids o a pe iod o massi e po olio capi al in lows, he cen al bank o Colombia implemen ed in May
2007 a hea edly deba ed p uden ial policy ool wi h he objec i e o educing he coun y’s ulne abili y o a
capi al lows sudden s op. The policy ool, called he G oss Le e age Posi ion in Fo eign Exchange De i a i es,
imposed a cap on a bank’s a io o g oss exchange a e de i a i es o capi al. The Banking Associa ion o he
coun y p o es ed he PBA, as hey conside ed i an ex eme measu e ha would no e ec i ely con ol c edi
and coun e pa y isk in he banking sec o and could ins ead limi he capaci y banks had o o e i ms and
households eliable inancial ins umen s o hedge agains exchange a e isk.
The cen al bank, a guing ha he PBA would limi he c edi isk exposu e o Colombian banks sa egua ding
he s abili y o he inancial sys em, imposed a 500% limi o he PBA e ec i e on May 6, 2007. In b ie , he
in en ion o his policy was o mode a e he c edi g ow h a e in Colombia, which acco ding o cen al bank
o icials was oo high and could lead o he de elopmen o undesi able inancial sec o imbalances and house
p ice bubbles. While economic au ho i ies in Colombia had al eady imposed a ax o o eign deb and o po olio
in es men in he coun y one yea be o e, hese measu es we e no unique o he coun y as B azil and Chile
had unde aken simila policies a oughly he same ime. The PBA, howe e , was implemen ed by Colombia
alone. In ac , such a policy had ne e been implemen ed be o e in any o he coun y. Ou esul s show, howe e ,
ha simila p uden ial policies can be success ully implemen ed in o he small open economies when sudden
capi al in low upsu ges may h ea en he s abili y o he inancial sec o .
While in a ious issues o he Financial S abili y Repo and in hei epo o Cong ess he cen al bank o
Colombia assu ed his p uden ial policy ool ul illed he pu pose o which i was c ea ed, no o mal policy
e alua ion was conduc ed o show he alidi y o hei conclusion. To he bes o ou knowledge, he e is only
one pape o mally s udying he e ec i eness o he mac op uden ial policy measu es unde aken by he cen al

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Banks’ Le e age in Fo eign Exchange De i a i es in Times o C ises: A Tale o Two Coun ies
Ca los Gi aldo | Iade Gi aldo | Jose E. Gomez-Gonzalez | Jo ge M. U ibe
bank o Colombia be ween 2006 and 2007 (Gomez e al., 2020). Howe e , hey ocus on wo mac op uden ial
policies, ma ginal ese e equi emen s and dynamic p o isions. Thei esul s sugges ha dynamic p o isions,
he coun e cyclical ese e equi emen , and an agg ega e measu e o he mac op uden ial policy s ance had a
nega i e e ec on c edi g ow h, which a ies acco ding o bank and deb o -speci ic cha ac e is ics. Howe e ,
hei esul s canno be in e p e ed as causal because hey do no use an adequa e coun e ac ual analysis.
We e alua e he causal e ec o he PBA implemen a ion on he s abili y o he inancial sys em o a ep esen-
a i e medium-sized eme ging ma ke economy, Colombia. We use syn he ic con ol me hods ollowing he
seminal pape s o Abadie and Ga deazabal (2003) and Abadie e al. (2010). These me hods, which ha e been
ecen ly used in he li e a u e o e alua e he e ec s o se e al economic policies, such as igh - o-ca y laws
(Donohue e al., 2019), immig a ion policy (Bohn e al., 2014), axa ion (Kle en e al., 2013), and pay-equi y laws
(McDonald and Tho n on, 2015), a e use ul when e alua ing he causal e ec s o agg ega e in e en ions. They
a e ools o disen angling causal e ec when in e en ions a e implemen ed a an agg ega e le el a ec ing
a small numbe o la ge uni s (like coun ies), on some agg ega e ou come o in e es .
II. Me hodology
Le Yi be he ou come ha would be obse ed in he inancial s abili y index o he coun y i a ime in he
absence o PBA, o coun ies i = 1, …, J + 1, and ime pe iods = 1,… T. Le T0 deno e he numbe o pe iods
be o e he PBA in e en ion, which sa is ies 1 ≤ T0 < T. Le Yi be he ou come ha would be obse ed om
coun y i a ime i coun y i is exposed o he in e en ion om T0 + 1 o T. We assume ha he PBA did no
ha e e ec s be o e Ma ch 31, 2007, which ma ks he las day o he qua e be o e he ac ual implemen a ion
o he policy on May 6, 2007. Tha is, be o e he i s qua e we assumed he e we e no any “an icipa ion
e ec s” on he policy.
Le ai = Yi - Yi be he e ec o he PBA in coun y i a ime , and Di deno e and indica o ha akes alue one
i coun y i is exposed o he PBA a ime , and ze o o he wise. Thus, he obse ed ou come o coun y i is
gi en by:
(1)
I only he i s coun y is exposed o he in e en ion and only a e pe iod T0, i ollows ha :
N
N
I
I
N
Yi = Yi + ai Di
Di = 1 i i=1 and > T0
0 o he wise (2)
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Banks’ Le e age in Fo eign Exchange De i a i es in Times o C ises: A Tale o Two Coun ies
Ca los Gi aldo | Iade Gi aldo | Jose E. Gomez-Gonzalez | Jo ge M. U ibe
Ou goal is o es ima e (a1T + 1 ,…, a1T ). Fo > T0 ,
(3)
Due o he ac ha Y1 is obse ed, o assess a1 we jus need o es ima e Y1 . Following Abadie e al. (2010)
we can assume ha Yi dynamics is d i en by a ac o model in he ollowing way:
(4)
whe e d is an unobse able common ac o , wi h cons an ac o loadings ac oss coun ies, Zi is a ( x 1) ec o
o obse ed co a ia es (una ec ed by he PBA implemen a ion), q is a ( x 1) ec o o unknown pa ame e s,
l is a (F x 1) ec o o unobse ed ac o loads, and ei a e andom noise a he coun y le el.
Abadie e al. (2010) show ha , gi en a (J x 1) ec o o weigh s W = (w2 ,…, wJ+1 )’ such ha wj ≥ 0 o j=1,…,J
+ 1 and all weigh s sum up o uni y, we ha e ha each pa icula ec o W ep esen s a po en ial syn he ic
con ol, o in o he wo ds, a pa icula weigh ed a e age o con ol coun ies in he “dono pool”. In his case,
he ou come o he inancial s abili y indica o o each syn he ic con ol indexed by W is gi en by:
(5)
Suppose ha he e exis (w2 ,…, wJ+1) which a e op imal, in he sense ha hey a e se as o minimize he dis ance
be ween he ou come p e- ea men se ies and he syn he ic con ol se ies be o e he policy in e en ion, and
minimize ∑J+1 wj Zj - Z1. In cases whe e he numbe o p e-in e en ion pe iods is la ge compa ed o he scale
o he coun y e o s we can use a1 as an es ima o o a1 . Such ha :
(6)
o ∈ {T0 +1,…,T}. These equa ions na u ally do no hold exac ly in p ac ice, as none con ex combina ion o
he con ol coun ies can pe ec ly eplica e he p e-in e en ion dynamics o he ea ed coun y. Thus, op imal
weigh s o bo h con ol uni s and p edic o s a e simul aneously se such ha hese equa ions hold app oxi-
ma ely. We use he “syn h” package in R, o es ima e bo h se s o weigh s.
0
a1 = Y1 -Y1 = Y1 - Y1
NI N
N
N
I
Yi = d + q Zi + l mi + ei ,
N
∑J+1 wj Yj = d + q ∑J+1 wj Zj + l ∑J+1 wj mj + ∑J+1 wj ej
j=2 j=2 j=2 j=2
* *
j=2
*
ˆ
a1 = Y1 - ∑J+1 wj Yj ,
*
ˆj=2
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Banks’ Le e age in Fo eign Exchange De i a i es in Times o C ises: A Tale o Two Coun ies
Ca los Gi aldo | Iade Gi aldo | Jose E. Gomez-Gonzalez | Jo ge M. U ibe
III. Da a
We acknowledge he ca ea s o syn he ic con ol me hods. Namely ha e en i he e exis s a syn he ic con ol
ha o e s a good i o Colombia (see Table 1), in e pola ion biases may be signi ican i he ac o model
ep esen ed by Equa ion 4 does no hold ela i ely well o e he en i e se o coun ies in ou sample. In his
case, esea che s aiming o minimize he biases caused by in e pola ing ac oss many he e ogeneous coun ies
wi h la gely dissimila cha ac e is ics should es ic he dono pool o coun ies wi h simila cha ac e is ics
o he coun y exposed o he policy in e en ion.
In ou case, his means ha we op ed o keeping a educed numbe o con ol uni s ollowing wo economic
easons: i s , he mac oeconomics li e a u e emphasizes on he undamen al ole o egional cha ac e is ics o
explain in e na ional capi al lows o coun ies (e.g. Kaminsky, 2005). The e o e, ou con ol uni s mus belong
o La in Ame ica. Second, he e is a g ea he e ogenei y o coun ies wi hin La in Ame ican coun ies, including
dolla ized economies (i.e., Ecuado , El Sal ado ), and economies ha a e pe cei ed as likely de aul e s om
hei in e na ional deb obliga ions (e.g., A gen ina, Venezuela). Ou selec ion o con ols is es ic ed o hose
coun ies ha possibly esemble Colombia mos , economically and in e ms o egula ion. In Table 1 we p es-
en he summa y s a is ics o ou a iables o Colombia and he con ol coun ies: B azil, Chile, Mexico, Pe u.
In ou se o p edic o a iables o he model in equa ion 4 we include: eal ou pu g ow h ( eal.g ow h), he
in es men o GDP a io (in es men . o.gdp), he unemploymen a e (unemploymen ), in la ion a e (in la ion),
he g ow h o eal es a e p ices ( eal.es a e.p ices), he mone a y base (mone a y.base), he cen al bank policy
a e ( a e), o eign ese es as pe cen age o GDP ( o eign. ese es), and he ollowing balances: iscal ( iscal.
balance), ade ( ade.balance), cu en accoun (cu en , balance), inancial accoun (capi al.balance), o al
di ec in es men (di ec .in es men .balance), o al po olio (po olio.balance), he o he in es men s (o he .
balance), all o hem as pe cen age o GDP. We also include he index o mul ila e al eal exchange a e ( eal.
exchange. a e). The sample mean o hese s a is ics is shown in he ou h column o Table 1.
IV. Resul s
1. Policy e alua ion in Colombia
Table 1 p esen s summa y s a is ics on ele an a iables o Colombia ( ea ed) and o he syn he ic con ol.
No ably, mean da a o he syn he ic a e close o obse ed mean da a o Colombia han (unweigh ed) sample
means o he coun ies included o building he con ol. This is especially ue o a iables which a e usually
conside ed as highly ela ed o inancial s abili y and s ill una ec ed by he policy, like eal es a e p ices.
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Banks’ Le e age in Fo eign Exchange De i a i es in Times o C ises: A Tale o Two Coun ies
Ca los Gi aldo | Iade Gi aldo | Jose E. Gomez-Gonzalez | Jo ge M. U ibe
Table 2 shows he op imal weigh s used o cons uc ing he syn he ic. Bo h p edic o weigh s (Panel A) and
coun y weigh s (Panel B) a e epo ed. Va iables co esponding o he ex e nal sec o , such as he cu en
accoun balance and he capi al balance, a iables ela ed o capi al lows, such as he eal exchange a e and
o eign di ec in es men , a e among he a iables wi h highes weigh s in building he syn he ic. Impo an o
no e, syn he ic Colombia is basically a con ex combina ion o Mexico and Chile.
Figu e 1 shows he e ec o he PBA implemen a ion on he Financial S abili y Index. Bo h he ac ual and
coun e ac ual alues o his index a e depic ed. The con inuous line ep esen s he beha io o e ime o
he index o Colombia ( ea ed). The do ed line ep esen s he beha io o he index o syn he ic Colombia
(con ol). Two momen s in ime a e highligh ed, namely he da e in which he PBA was implemen ed (qua e
co esponding o May 6, 2007) and he da e o he Lehman B o he s de aul in Sep embe 2008. Recall ha
highe (lowe ) alues o he index co espond o si ua ions o highe (lowe ) inancial s abili y. Acco ding o ou
esul s, he PBA had an impac on inancial s abili y in Colombia. Howe e , he impac was no homogeneous
o e ime. In e es ingly, when he policy measu e was unde aken, be o e he beginning o he Global Financial
C isis, he PBA was de imen al o he o e all inancial s abili y o he Colombian inancial sec o . This appa -
en ly coun e in ui i e esul may be explained by he ac ha his mac op uden ial policy cons ains he abili y
Table 1. Summa y s a is ics o ele an a iables: Colombia, syn he ic Colombia, and sample
a e ages
Va iable T ea ed Syn he ic Sample.Mean
eal.g ow h 6.2 4.0 4.8
in es men . o.gdp 22.1 22.2 20.2
unemploymen 11.7 4.8 8.1
in la ion 4.7 3.7 3.4
eal.es a e.p ices 11.5 3.3 2.0
mone a y.base 6.2 3.7 4.0
a e 6.7 7.3 8.5
o eign. ese es 10.1 9.2 11.6
iscal.balance -4.0 1.2 0.9
ade.balance 0.6 3.0 5.2
cu en .balance -1.4 0.3 1.3
capi al.balance 1.3 -0.2 -1.1
di ec .in es men e.balance 3.4 2.8 2.8
po olio.balance -0.9 -1.7 -0.9
o he . lows -0.1 -0.4 -1.6
eal.exchange. a e 110,334 93,314 92,121
No e: he able shows he sample means o he ea ed Colombia (column 2), syn he ic Colombia (column 3), and he unweigh ed sample
mean o con ol uni s (colum 4).
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Banks’ Le e age in Fo eign Exchange De i a i es in Times o C ises: A Tale o Two Coun ies
Ca los Gi aldo | Iade Gi aldo | Jose E. Gomez-Gonzalez | Jo ge M. U ibe
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