Macroprudential policy and bank systemic risk

Abstract

This paper investigates the effectiveness of macroprudential policy to contain the systemic risk of European banks between 2000 and 2017. We use a new database (MaPPED) collected by experts at the ECB and national central banks with narrative information on a broad range of instruments which are tracked over their life cycle. Using a dynamic panel framework at a monthly frequency enables us to assess the impact of macroprudential tools and their design on the banks' systemic risk both in the short and the long run. We furthermore decompose the systemic risk measure in an individual bank risk component and a systemic linkage component. This is of particular interest because microprudential policy focuses on the tail risk of an individual bank while macroprudential policy targets systemic risk by addressing the interlinkages and common exposures across banks. On average, all banks benefit from macroprudential tools in terms of their individual risk. We find that credit growth tools and exposure limits exhibit the most pronounced downward effect on the individual risk component. However, we find evidence for a risk-shifting effect which is more pronounced for retail-oriented banks. The effects are heterogeneous across banks with respect to the systemic linkage component. Liquidity tools and measures aimed at increasing the resilience of banks decrease the systemic linkage of banks. However, these tools appear to be most effective for distressed banks. Our results have implications for the optimal design of macroprudential instruments.

Macroprudential Policy and Credit Risk in Dual Banking System

“…Dutta and Saha (2020) found that macroprudential policy were able to minimize financial risk exposure even though it was more effective during normal condition than financial turmoil. This finding is also in line with Meuleman and Vennet (2020), Esteban et al, (2020), Thi and Anh (2019) and Zhang et al, (2018) who also found that macroprudential policy lessened the bank's individual risk over the observation period.…”

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“…Counterfactual simulations indicate that, if the countries had not used any macroprudential policy measures in the period 2011-2013, the bank credit growth, housing credit growth and house price appreciation would have been substantially higher. Similarly, Meuleman and Vander Vennet (2020) demonstrate that the macroprudential policy instruments reduce individual bank risks, as well as bank systemic risk, as assessed by stock market investors. The latter is an important finding because reducing systemic risk is the key goal of macroprudential policies.…”

Measurement of Systemic Risk in the Colombian Banking Sector

“…The results show that the primary channel behind this relation is reduced leverage, but lower portfolio risk also plays a role. Meuleman and Vennet (2020) investigate the effectiveness of macroprudential policy to determine systemic risk in the short and long run. The systemic risk criteria are decomposed into an individual bank risk component and a systemic linkage component.…”