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Borrower- and lender-based macroprudential policies: What works best against bank systemic risk?

Journal: Journal of International Financial Markets Institutions and Money

Date: 2022

Author: Nicholas Apergis, Ahmet F. Aysan, Yassine Bakkar

Abstract:
This paper investigates the complementarity between the different macroprudential policies to contain bank systemic risk. We use a newly updated version of the IMF survey on Global Macroprudential Policy Instruments (GMPI). By disentangling the aggregate macroprudential policy index, we assess the complementarity between borrower-targeted and lender-targeted instruments in mitigating systemic risk arising from intra-financial system vulnerabilities. We investigate the effect of boom-bust cycle on such a relationship by analyzing the financial upturns and downturns and show the effectiveness of the macroprudential policies during calm period. We also show that their efficacy in mitigating instability is quite heterogeneous and may vary depending on the set of tools implemented, as well as bank size, TBTF, leverage, liquidity and concentration. Our results bear critical policy implications for implementing optimal macroprudential tools and provide insights into the trade-off between financial vis-a-vis price stability.

Link: Google Scholar

Background and Context

Study Scope

Research examines how different macroprudential policies affect bank systemic risk using data from 662 banks across 27 OECD countries during 2001-2013.

Policy Types

Analysis focuses on two main types of macroprudential tools: Financial Institution-Targeted Instruments (FITI) and Borrower-Targeted Instruments (BTI).

Methodology

Study uses panel regression models and various risk measures including Marginal Expected Shortfall (MES) to assess policy effectiveness during different economic conditions.

Effectiveness of Macroprudential Policies in Reducing Systemic Risk

  • All types of macroprudential policies significantly reduce bank systemic risk
  • Borrower-targeted instruments (BTI) show the strongest effect in reducing systemic risk
  • Financial institution-targeted instruments (FITI) also demonstrate significant effectiveness

Impact of Economic Conditions on Policy Effectiveness

  • Policies show different effectiveness during normal vs. crisis periods
  • FITI becomes more effective during financial distress
  • BTI shows opposite effects during different economic conditions

Bank Size Impact on Policy Effectiveness

  • Macroprudential policies are less effective for larger banks
  • Too-Big-To-Fail (TBTF) banks show the least response to policies
  • Small banks demonstrate the strongest response to policy implementation

Comparison with Monetary Policy Impact

  • Macroprudential policies show stronger impact than monetary policy
  • Monetary policy demonstrates limited effectiveness in controlling systemic risk
  • Results support the increasing focus on macroprudential tools for financial stability

Policy Effectiveness Across Bank Features

  • Policy effectiveness varies significantly across different bank characteristics
  • Leverage channel shows the strongest transmission of policy effects
  • Bank concentration and liquidity levels influence policy effectiveness

Contribution and Implications

  • First comprehensive study analyzing complementarity between borrower and lender-targeted macroprudential policies in OECD countries
  • Demonstrates importance of considering economic conditions when implementing macroprudential policies
  • Provides evidence supporting expansion of macroprudential policy toolkit for financial stability

Data Sources

  • Policy effectiveness visualization based on Table 4
  • Economic conditions analysis derived from Table B3
  • Bank size impact based on Table 9
  • Policy comparison data from Table 5
  • Bank features analysis based on Table 9