DO MACROPRUDENTIAL POLICY INSTRUMENTS AFFECT THE LINK BETWEEN LENDING AND CAPITAL RATIO? – CROSS-COUNTRY EVIDENCE

Małgorzata Olszak, Iwona Kowalska () and Sylwia Roszkowska ()
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Iwona Kowalska: Department of Mathematics and Statistical Methods, Faculty of Management, University of Warsaw, Poland
Sylwia Roszkowska: Faculty of Economic and Social Sciences, University of £ódŸ, National Bank of Poland, Poland

No 22016, Faculty of Management Working Paper Series from University of Warsaw, Faculty of Management

Abstract: In this paper we ask about the capacity of macroprudential policies to reduce the positive association between loans growth and the capital ratio. We focus on aggregated macroprudential policy measures and on individual instruments and test whether their effect on the association between lending and capital depends on bank size, the economic development of a country as well as on the extent of capital account openness. Applying the GMM 2-step Blundell and Bond approach to a sample covering over 60 countries, we find that macroprudential policy instruments reduce the impact of capital on bank lending during both crisis and non-crisis times. This result is stronger in large banks than in other banks. Of individual macroprudential instruments, only borrower-targeted LTV caps and DTI ratio weaken the association between lending and capital. Our results also show that the effect of macroprudential policies on the association between lending and the capital ratio in non-crisis periods is stronger in advanced countries than in emerging countries. Additionally, differentiating by the level of capital account openness, we find that macroprudential policies are more effective in increasing the resilience of banks and thus weakening the association between loan supply and capital ratio for relatively closed economies but less effective for relatively open economies. Generally, with our study we are able to support the view that macroprudential policy has the potential to curb the procyclical impact of bank capital on lending and therefore, the introduction of more restrictive international capital standards included in Basel III and of macroprudential policies are fully justified.

Keywords: loan supply; capital ratio; procyclicality; macroprudential policy (search for similar items in EconPapers)
JEL-codes: E32 G21 G28 G32 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2016-08
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:sgm:fmuwwp:22016

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