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The effects of macroprudential policy on banks' profitability

E. Philip Davis, Dilruba Karim and Dennison Noel

International Review of Financial Analysis, 2022, vol. 80, issue C

Abstract: We estimate the effects of macroprudential policy on bank profitability, using a sample of 7250 global banks over 1990–2018. A number of policy measures have a negative impact on profitability, but these effects vary according to countries' economic development, bank type and time period. Macroprudential policy also adversely affects profitability of small and highly capitalised banks more than larger and less capitalised banks. Comparing our results with existing estimates of the impact of macroprudential policy on credit expansion, some measures are found to reduce lending but not profitability; others affect both negatively; and some affect profitability with no significant effect on lending. Since it is desirable for banks to make profits and thus be able to build up capital from retained earnings, our results suggest that care is needed in choosing measures according to their effects on bank profitability.

Keywords: Macroprudential policy; Bank profitability; Return of average assets; Return on average equity (search for similar items in EconPapers)
JEL-codes: E44 E58 G17 G28 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.irfa.2021.101989

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