Does Competition Matter for the Effects of Macroprudential Policy on Bank Asset Growth?

Abstract

This paper attempts to find out what is the role of competition in the effects of macroprudential policy in a cross-country sample of over 9000 commercial banks in the period of 2004–2016. We focus on two areas of work of macroprudential policy that may be potentially affected by competition. The first one is the area of asset growth. The other is procyclicality proxied with the link between bank asset growth and business cycle. Our results show that competitive environment in the banking industry does affect the conduct of macroprudential policy. High competition is associated with increased asset growth in countries applying more macroprudential policy instruments affecting risk taking by banks. The association between competition and effects of macroprudential policy on sensitivity of asset growth to business cycle differs between cyclical and resilience oriented tools. Intense competition in the banking industry is associated with decreased procyclicality of assets growth in countries using cyclical instruments. In contrast, more competitive banking industry is associated with increased procyclicality of asset growth in countries using resilience-oriented tools.