Abstract
ABSTRACTIn this paper, we ask about the capacity of macroprudential policies to reduce the procyclical impact of capital ratio on bank lending. We focus on aggregated macroprudential policy measures and on individual instruments and test whether their effect on the association between lending and capital depends on bank size. Applying the GMM 2-step Blundell and Bond approach to a sample covering over 60 countries, we find that macroprudential policy instruments reduce the procyclical impact of capital on bank lending during both crisis and non-crisis times. This result is stronger in large banks than in other banks. Of individual macroprudential instruments, only borrower-targeted LTV caps and DTI ratio weaken the association between lending and capital and thus act countecyclically. Generally, with our study we are able to support the view that macroprudential policy has the potential to curb the procyclical impact of bank capital on lending and therefore, the introduction of more restrictive international capital standards included in Basel III and of macroprudential policies are fully justified.
Highlights
The Global Financial Crisis (GFC) has highlighted the need to go beyond a purely microprudential approach to regulation and supervision of the banking sector
We find a consistent and strong effect of macroprudential policies on the association between loans growth and capital ratio
Analysis of the role of individual macroprudential policy instruments shows that only two borrower-based instruments, i.e. loan-to-value ratio (LTV)-caps and debt-to-income ratio (DTI) ratios weaken the positive effect of capital ratio on lending
Summary
The Global Financial Crisis (GFC) has highlighted the need to go beyond a purely microprudential approach to regulation and supervision of the banking sector. There is a growing consensus among financial practitioners (BCBS, 2011, CGFS, 2012; ESRB, 2014) and researchers (Lim et al, 2011; Claessens, Ghosh, & Mihet, 2014; Cerutti, Claessens, & Laeven, 2015) that a set of macroprudential policy standards should be adopted. Such standards should increase the resilience of the banking sector to systemic risk and help curb the credit cycle (CGFS, 2012), thereby decreasing excessive procyclicality
Sign-in/Register to view highlights & summary 
Published Version (
Free)
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call