Macroprudential policy and bank stability : international evidence.

This study investigates the impact of macroprudential policies on bank risk. We contribute to the literature by examining the effectiveness of five different types of macroprudential policies; namely capital based instruments, asset based instruments, liquidity instruments, reserve requirements and foreign exchange based instruments, for 132 countries over the period 1996 - 2017. We also examine whether the effectiveness of the macroprudential policies in mitigating bank risk depends on other financial and institutional factors of the country. Our main findings are as follows: First, we find that capital based instruments are the most effective policy instruments to reduce bank risk. Second, certain macroprudential policies work better in reducing bank risk under a more competitive banking environment than others. Third, better institutions and regulations help enhance the effectiveness of macroprudential policies on bank risk. Finally, the effect of macroprudential policies on bank risk are asymmetric. Generally, tightening episodes are more effective than loosening episodes. These results are robust to alternative measures of banking sector risk and macroprudential indicators