Monetary Policy, Macroprudential Policy, and Financial Stability

Martínez-Miera, David; Repullo, Rafael

doi:10.2139/ssrn.3427096

Cited by 3 publications

(13 citation statements)

References 12 publications

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“…This means that banks with higher capital adequacy ratios enjoy a lower cost of funds. This result is aligned with findings of earlier research (Gambacorta and Shin, 2018; Martinez-Miera and Repullo, 2019). Both control variables, bank size and GDP growth, are significantly related to a lower cost of funds.…”

Section: Resultssupporting

confidence: 93%

“…The GMM method has been applied as well as a dynamic panel model. This study has generated valuable results which are supported by past studies (Gambacorta and Shin, 2018;Martinez-Miera and Repullo, 2019;Montgomery, 2005). Evidence of market discipline has been found, in the form of a higher cost of funds in the context of capital adequacy (but not for other CAMEL variables).…”

Section: Conclusion Limitations and Further Researchsupporting

confidence: 74%

“…In the presence of market discipline, the cost of funds should be a good indicator of the risk associated with banks (Afzal et al, 2021;Martinez-Miera and Repullo, 2019) higher risk profiles, these customers should require higher rates of return from the banks as compensation. The cost of funds is estimated using the formula given below.…”

Section: Methodsmentioning

confidence: 99%

“…In the presence of market discipline, the cost of funds should be a good indicator of the risk associated with banks (Afzal et al. , 2021; Martinez-Miera and Repullo, 2019). Market discipline requires depositors who are able to assess this level of risk accurately.…”

Section: Methodsmentioning

confidence: 99%

“…Specifically, they observed that higher capital ratios are related to lower risk in banks. In this context, binding capital requirements encourage movement towards safer investment options, decrease bank risk and lower the costs of funds (Martinez-Miera and Repullo, 2019). So these requirements are valuable for supporting financial stability.…”

Section: Background Literaturementioning

confidence: 99%

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Does the market discipline banks? Evidence from Balkan states

Afzal

Firdousi

2022

JRF

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PurposeThis research is designed to investigate the presence of market discipline in the banking sector, across Balkan states in Europe. Specifically, the effects of CAMEL variables on the cost of funds and deposit-switching have been assessed.Design/methodology/approachThe CAMEL method of bank evaluation has been applied as well as two measures for market discipline (costs of funds and deposit-switching behaviour). Data have been obtained for 10 Balkan states for the 2006–2019 period. For data analysis, ordinary least squares (OLS) and fixed effects models have been utilized. The generalized method of moments (GMM) method has been deployed as well as a dynamic panel model.FindingsEvidence of market discipline has been found, in the form of a higher cost of funds in the context of capital adequacy (but not for other CAMEL variables). Evidence of market discipline in the form of deposit-switching, however, has not been found. In addition, it has been discovered that bank size and gross domestic product (GDP) growth lower the costs of funds for banks.Originality/valueIn the wake of the pandemic, banks need to prepare themselves for very difficult situations and relevant studies can provide help. Therefore, this research has contributed to the developing literature on this topic. In addition, the findings have important practical implications. Results show that banks should maintain adequate levels of capital if they want to control their costs of funds. Results also show that market discipline, in the form of higher costs of funds, can be imposed on banks to discourage excessive risk-taking. Findings highlight the value of appropriate policies and strong supervision of the financial industry. Findings also underline the importance of offering financial incentives to banks. For example, if banks know they will be able to avoid higher costs of funds by controlling their risk levels, they will avoid unrestrained risk-taking.

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Section: Resultssupporting

confidence: 93%

Section: Conclusion Limitations and Further Researchsupporting

confidence: 74%

Section: Methodsmentioning

confidence: 99%

Section: Methodsmentioning

confidence: 99%

Section: Background Literaturementioning

confidence: 99%

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Does the market discipline banks? Evidence from Balkan states

Afzal

Firdousi

2022

JRF

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Optimal monetary policy with the risk-taking channel

Abbate

Thaler

2023

European Economic Review

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Bank risk exposures and bank stability in Africa: the role of regulations in a non-linear model

Ofori‐Sasu

Mekpor

Adu-Darko

et al. 2023

JFRC

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Purpose This paper aims to examine the interaction effect of regulations (monetary and macro-prudential) in explaining the possible non-linear effect of bank risk exposures (credit risk and insolvency risk) on banking stability in Africa. Design/methodology/approach The study uses a two-step system generalized method of moments (GMM) estimator for a data set of banks across 54 African countries over the period 2006–2020. Findings The authors find that the relationships between bank credit risk–bank stability and bank insolvency risk–bank stability are non-linear and characterized by the presence of optimal thresholds, which are 5.3456 for credit risk and 2.3643 for insolvency. Contrary to their positive effects below these optimal thresholds, credit risk and insolvency risk become negatively linked to bank stability in Africa. The authors find that macro-prudential action and monetary policy both have a positive and significant relationship with bank stability. The authors provide evidence to support that the marginal effect of excessive credit risk and insolvency risk on bank stability is reduced when interacted with monetary and macro-prudential regulations, and the impact is significant in strong institutional environment. Research limitations/implications Future research should extend data to include developing and emerging economies in the world. Also, policymakers, researchers and practitioners should consider different regulatory and institutional frameworks in explaining the relationship between the thresholds of bank risk exposures and bank stability in the world. Practical implications Regulatory authorities should have to deeply reform their financial systems, develop risk-based regulatory framework and effective supervision mechanism relating to appropriate techniques that maintain an optimal and desired level of bank risks and risk-taking behaviours required to ensure a stable banking system. Originality/value To the best of the authors’ knowledge, this is the first study to examine how different regulatory frameworks shape the non-linear impact of bank risk exposures on bank stability in Africa.

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Monetary Policy, Macroprudential Policy, and Financial Stability

Cited by 3 publications

References 12 publications

Does the market discipline banks? Evidence from Balkan states

Does the market discipline banks? Evidence from Balkan states

Optimal monetary policy with the risk-taking channel

Bank risk exposures and bank stability in Africa: the role of regulations in a non-linear model

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