Effect of Prudential Policies on Sovereign Bond Markets: Evidence From the ASEAN-4 Countries

Abstract

This paper examines the effects of prudential policies on the sovereign vulnerability of ASEAN-4 countries. We measure sovereign vulnerability within the network connectedness of sovereign bonds between ASEAN-4 countries (Indonesia, Malaysia, the Philippines and Thailand) and six other countries (the US, the UK, the European Union, China, India and Japan) from 2012 to 2022. Local projections (LPs) are employed to estimate the dynamic effects of prudential measures. The effects are analysed across various prudential instruments, including reserve requirements, capital requirements, capital buffers, loan-to-value ratio caps and concentration limits. The results suggest that markets with tighter prudential policies are significantly less exposed to the sovereign shocks of other economies. The efficacy period of prudential policy in mitigating sovereign vulnerability becomes significant after seven quarters. Capital requirements and concentration limits show immediate effects, while reserve requirements operate with a longer delay.