Abstract
This paper constructs a theoretical model to analyze the effect of macroprudential policies (MPPs) on bank risk-taking. We collect a data set of 231 commercial banks in China to empirically test whether macroprudential tools, including countercyclical capital buffers, reserve requirements, and caps on loan-to-value, can affect bank risk-taking behaviors by using the dynamic unbalanced panel system generalized method of moment (SYS-GMM). The results provide further evidence on the important role of MPPs in maintaining financial stability, which helps mitigate financial system vulnerabilities. Bank risk-taking will be decreased with the strengthening of macroprudential supervision, which greatly benefits the resilience and the sustainability of bank sector. Moreover, the credit cycle has a magnifying role on MPPs’ effect on bank risk-taking. Reducing risks in bank loans requires a further slowing of credit growth, which is necessary to ensure sustainable growth in a bank system, or more ambitiously, to smooth financial booms and busts. The results survive robustness checks under alternative estimation methods and alternative proxies of bank risk-taking and MPPs.
Highlights
Macroprudential policies (MPPs) have been placed in an extremely important position by many countries after the global financial crisis of 2008, which was the starting point for macroprudential supervision in China
We focus on the effect of MPPs on bank risk-taking, which is related to the sustainable development of the bank sector and financial system
The results show that bank risk-taking behaviors will be reduced with the strengthening of macroprudential supervision according to the estimation of the individual macroprudential tools and group macroprudential tools of Countercyclical Capital Buffer (CCB), RR and LTV
Summary
Macroprudential policies (MPPs) have been placed in an extremely important position by many countries after the global financial crisis of 2008, which was the starting point for macroprudential supervision in China. We focus on the effect of MPPs on bank risk-taking, which is related to the sustainable development of the bank sector and financial system. We empirically analyze the effectiveness of three macroprudential tools, i.e., CCB, RR and LTV, including the individual and overall effects of these three tools in reducing bank risk-taking behaviors using the bank-specific data of 231 commercial banks in China. We overcome the challenge of evaluating the effects of MPPs when more than one tool is activated, as the combined effects of three tools are tackled in our estimation These results help policymakers design coordinated MPPs to stabilize the bank sector and promote the sustainable development of commercial banks.
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