Abstract
This paper investigates the impact of different country-traits of the effects of macroprudential policies on systemic risks in OECD countries. The analysis documents that institutional quality, high capital stringency, and moderate supervision support macroprudential policies in mitigating systemic risks, depending on macroprudential instruments in force. Institutional, regulatory and supervisory frameworks differently affect the effectiveness of lender- vis-à-vis borrower-targeted policies.
Highlights
There exists limited research on the sources of heterogeneity in the effects of macroprudential policies on stability
This study follows Delis et al (2012) who exemplify the importance of crosscountry heterogeneity when assessing the effect of different types of bank regulation on stability and investigate whether institutional quality, regulatory, and supervisory frameworks determine the potency between macroprudential policies and systemic risks
The effect of country-traits is analyzed in two ways: (i) including one panel of interaction terms with macroprudential policies index (MPI) at-a-time, and (ii) including both sets of interaction terms simultaneously
Summary
There exists limited research on the sources of heterogeneity in the effects of macroprudential policies on stability. There is an agreement that in safeguarding stability, institutional features condition the efficacy of bank regulations (Altunbas et al, 2018; Gaganis et al, 2020). We examine their importance and strength for systemic risks as a function of the institutional and regulatory environment in which banks operate. Building on better institutional and regulatory setups that enhance the implementation capacity of regulators, we argue that country-specific features condition the effect of macroprudential policies on stability via two channels. Certain types of regulation affect banks’ incentives to take on diverse risks, and investors to control risk-taking These channels could influence the strength of the macroprudential policies-stability nexus
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