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Macroprudential Policy, Credit Cycle, and Bank Risk-Taking

Xing Zhang (), Fengchao Li (), Zhen Li () and Yingying Xu ()
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Xing Zhang: School of Finance, Renmin University of China, Beijing 100872, China
Fengchao Li: School of Finance, Renmin University of China, Beijing 100872, China
Zhen Li: School of Finance, Renmin University of China, Beijing 100872, China
Yingying Xu: Donlinks School of Economics and Management, University of Science and Technology Beijing, Beijing 100083, China

Sustainability, 2018, vol. 10, issue 10, 1-18

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.

Keywords: macroprudential policy; credit cycle; bank risk-taking; SYS-GMM (search for similar items in EconPapers)
JEL-codes: Q Q0 Q2 Q3 Q5 Q56 O13 (search for similar items in EconPapers)
Date: 2018
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