Do Macroprudential Policy Instruments Affect the Link Between Lending and Capital Ratio? - Cross-Country Evidence
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. (original abstract)
- Aiyar, S., Calomiris, Ch.W., Hooley, J., Korniyenko Y., Wieladek, T., 2014. The International Transmission of Bank Capital Requirements: Evidence from the UK, Journal of Financial Economics, 113, pp.368-382.
- Arellano, M., Bond, S., 1991. Some tests of specification for panel data: Monte Carlo evidence and application to employment equations. Review of Econometric Studies 58:227-297.
- Basel Committee on Banking Supervision (BCBS), 2011. Basel III: a global regulatory framework for more resilient banks and banking systems. Basel: Bank for International Settlements.
- Basel Committee on Banking Supervision, 2010. An assessment of the long-term economic impact of stronger capital and liquidity requirements. Bank for International Settlements,
- Bassett, W. F., Chosak, M. B., Driscoll, J. C., Zakrajasek, E., 2014. Changes in bank lending standards and the macroeconomy. Journal of Monetary Economics, 62(6). DOI: 10.1016/j.jmoneco.2013.12.005.
- Beatty, A., Liao, S.,2014., Financial accounting in the banking industry: A review of the empirical literature. Jounral of Accounting and Economics58, 339-383
- Beatty, A., Liao, S., 2011. Do delays in expected loss recognition affect banks' willingness to lend? Journal of Accounting and Economics52, 1-20
- Berger, A., Herrig,R. J., Szegö, G.P., 1995. The role of capital in financial institutions. Journal of Banking and Finance, 19. DOI:10.1016/0378-4266(95)00002-X.
- Bernanke, B. S., Lown, C.S., 1991. The Credit Crunch. Brookings Papers on Economic Activity, 2.
- Berrospide, J.M., Edge, R.M., 2010. The effects of bank capital on lending: What do we know? And What does it mean? International Journal of Central Banking 6(4), December 2010, 5-54.
- Bikker, J. A., Metzemakers, P.A.J., 2005. Bank provisioning behavior and procyclicality. Journal of International Financial Markets, Institutions and Money, 15. DOI:10.1016/j.intfin.2004.03.004.
- Blaes, B., 2011. Bank-related loan supply factors during the crisis: an analysis based on the German bank lending survey, Number 2011, 31. Discussion Paper Series 1: Economic Studies.
- Blundell, R., Bond, S., 1998. Initial conditions and moment restrictions in dynamic panel data model. Journal of Econometrics 87, 115-143.
- Borio, C., 2009. Implementing the macroprudential approach to financial regulations and supervision. Financial Stability Review, No 13 -The future of financial regulation, Banque de France: 31-41.
- Borio, C., Zhu, V. H.,2012. Capital Regulation, Risk-Taking, and Monetary Policy: A Missing Link in the Transmission Mechanism? Journal of Financial Stability 8: 236-251. DOI:10.1016/j.jfs.2011.12.003.
- Bridges, J., Gregory, D., Nielsen, M., Pezzini, S., Radia, A., Spaltro, M., 2014. The impact of capital requirements on bank lending. Working Paper No. 486. Bank of England.
- Carlson, M., Shan, H., Warusawitharana, M., 2013. Capital ratios and bank lending: A matched bank approach. Journal of Financial Intermediation 22, 663-687
- Cerutti, E., Claessens, S., Laeven, L., 2015. The Use and Effectiveness of Macroprudential Policies: New Evidence, IMF Working paper WP/15/61
- Chinn, M.D., Ito, H., 2008. A New Measure of Financial Openess. Journal of Comparative Policy Analysis10:3, 309-322.
- Chiuri, M. C., Ferri, G., Majnoni, G., 2002. The macroeconomic impact of bank capital requirements in emerging economies: Past evidence to assess the future. Journal of Banking and Finance, 26. DOI:10.1016/S0378-4266(01)00267-9.
- Claessens, S., Ghosh, S., Mihet, R., 2013. Macro-Prudential Policies to Mitigate Financial System Vulnerabilities. Journal of International Money and Finance, 39:153-185.
- Claessens, S.,Ghosh, S., Mihet, R., 2014. Macro-Prudential Policies to Mitigate Financial System Vulnerabilities. IMF Working Paper WP/14/155
- Committee on the Global Financial System, 2010. Macroprudential instruments and framework: a stocktaking of issues and experiences. CGFS Papers 38, Bank for International Settlements.
- Committee on the Global Financial System, 2012. Operationalising the selection and application of macroprudential instruments. CGFS Papers No 48. Bank for International Settlements. 2012.
- Crowe, Ch. W., Deniz, I., Dell'Ariccia, G., Rabanal, P., 2011. How to Deal with Real Estate Booms. IMF Staff Discussion Note 11/02.
- De Haan, J., Poghosyan, T., 2012. Bank size, market concentration and bank earnings volatility in the US, Journal of International Financial Markets, Institutions, and Money 22:35-54.
- De Nicolò, G., Gamba A., Lucchetta M., 2012. Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking. IMF Working Paper 12/72.
- Del Giovane, P., Eramo, G., Nobili, A. 2011. Disentangling demand and supply in credit developments: A survey-based analysis for Italy. Journal of Banking and Finance, 35(10). DOI:10.1016/j.jbankfin.2011.03.001.
- Dell'Ariccia, G., Deniz, I., Laeven, L., Tong, H., Bakker, B., Vandenbussche J. , 2012. Policies for Macrofinancial Stability: How to Deal with Credit Booms, IMF Staff Discussion Note 12/06.
- Dell'Ariccia, G., Igan, D., and Laeven, L. (2012). Credit booms and lending standards: Evidence from the subprime mortgage market. Journal of Money, Credit and Banking, 44(23).
- Deniz, I., Kang, H., 2011. Do Loan-to-Value and Debt-to-Income Limits Work? Evidence from Korea, IMF Working paper 11/297.
- Dewatripont, M., Tirole, J., 1994. The Prudential Regulation of banks', MIT Press, Cambridge, MA.
- European Systemic Risk Board, 2014. The ESRB Handbook on Operationalising Macro-prudential Policy in the Banking Secto., ESRB 2014.
- Fang, Y., Hasan, I., Li, L., 2014. Banking reform, risk-taking, and earnigns quality -Evidence from transition countries. BOFIT Discussion Papers 19/2014, Bank of Finland.
- Financial Stability Board, Bank for International Settlements, International Monetary Fund, 2011. Macroprudential tools and frameworks. Progress Report to G20, 27 October.
- Foos, D., Norden, L., Weber, M., 2010. Loan growth and riskiness of banks, Journal of Banking & Finance 34, s. 2929-2940
- Freixas X, G. Loranth and A.D. Morrison (2007), 'Regulating financial conglomerates', Journal of Financial Intermediation16, 479-514.
- Freixas, X., Rochet, J., 1997. Microeconomics of Banking. Cambridge: MIT Press.
- Gibbon,M.S.,1995.Can bank health affect investment? Evidence from Japan, The Journal of Business68(3): 281-308.
- Gambacorta, L., Mistrulli, P. E., 2004. Does bank capital affect lending behavior? Journal of Financial Intermediation, 13. DOI:10.1016/j.jfi. 2004.06.001.
- Gambacorta, L., Marqués-Ibáñez D. 2011, 'The bank lending channel. Lessons from the crisis.' Working Paper Series No 1335/May 2011, European Central Bank.
- Hancock, D., Wilcox, J.A., 1994a. Bank Capital and the Credit Crunch: The Roles of Risk-Weighted and Unweighted Capital Regulation. Journal of the American Real Estate and Urban Economics Association, 22. DOI: 10.1111/1540-6229.00626
- Hancock, D., Wilcox, J.A., 1994b. Bank Capital,Loan Delinquencies, and Real Estate Lending. Journal of Housing Economics, 3. DOI:10.1006/jhec.1994.1004.
- Hancock, D., Wilcox, J.A., 1997. Bank capital, Non-bank Finance, and Real Estate Activity. Journal of Housing Research, 8.
- Hancock, D., Wilcox, J.A., 1998. The "Credit Crunch" and the Availability of Credit to Small Business. Journal of Banking and Finance, 22(6-8). DOI:10.1016/S0378-4266(98)00040-5.
- Horváth, B., Wagner, W., 2012. The disturbing interaction between countercyclical capital requirements and systemic risk. Working paper. Tillburg University.
- Illueca, M., Norden, L., Udell, G. F., 2015. Conditional Accounting Conservatism and Bank Risk-taking. Working Paper.
- International Monetary Fund (IMF), 2011a. Macroprudential Policy: An Organizing Framework. Paper prepared by the Monetary and Capital Markets Department. International Monetary Fund.
- International Monetary Fund (IMF), 2011b. Macroprudential Policy Tools and Frameworks. Progress Report to G20, 27 October 2011.
- International Monetary Fund (IMF), 2013. Key aspects of Macroprudential Policy - Background paper. IMF Policy Paper. Washington: International Monetary Fund.
- Jackson, P., Furfine, C., Groeneveld, H., Hancock, D., Jones, D., Perraudin, W., Radecki L., Yoneyama, M., 1999. Capital Requirements and Bank Behaviour: The Impact of The Basle Accord. Basle: Bank for International Settlements.
- Jiménez, G., Ongena, S. R. G., Peydro, J., Saurina J., 2012. Macroprudential Policy, Countercyclical Bank Capital Buffers and Credit Supply: Evidence from the Spanish Dynamic Provisioning Experiments, European Banking Center Discussion Paper 2012-011.
- Kishan, R., and Opiela, T. (2000). Bank size, bank capital, and the bank lending channel. Journal of Money, Credit, and Banking, 32(1):121-41
- Kishan, R., and Opiela, T. (2006). Bank Capital and Loan Asymmetry in the Transmission of Monetary Policy. Journal of Banking and Finance, 30. DOI:10.1016/j.jbankfin.2005.05.002.
- Kuttner, K.N., Shim, I., 2013. Can non-interest rate policies stabilize housing markets? Evidence from a panel of 57 economies. BIS Working Papers No 433.
- Labonne, C., Lame, G., 2014. Credit Growth and Bank Capital Requirements: Binding or Not? Working Paper
- Laeven, L., Ratnovski L., Tong, H., 2014. Bank Size and Systemic Risk, Staff Discussion Notes14/4, IMF, Washington, D.C.
- Lim, C., Columba, F., Costa, A., Kongsamut, P., Otani, A., Saiyid, M., Wezel, T., Wu, X., 2011. Macroprudential Policy: What Instruments and How to Use Them? Lessons from Country Experiences. IMF Working Paper11/238.
- Merton, R. C., 1974. On the pricing of corporate debt: the risk structure of interest rates, Journal of Finance, 29, 449-70.
- Minsky, H.P., 1986. Stabilizing an unstable economy. Mc Graw Hill 2008
- Mora, N., Logan, A., 2012. Shocks to bank capital: Evidence from UK Banks at Home and Away. Applied Economics44 (9), 1103-1119.
- Myers, S., Majluf, N., 1984. Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics13, 187-221
- Nag, A.K., Das, A., 2002. Credit growth and response to capital requirements: Evidence from Indian public sector banks, Economic and Political Weekly 37.
- Nier,E., Zicchino,L., 2008. Bank Losses, Monetary Policy and Financial Stability-Evidence on the Interplay from Panel Data. IMF Working Paper WP/08/232
- Norden,L., Stoian,A.,2013.Bank earnings management through loan loss provisions: A double-edged sword?, Working Paper 404, De Netherlandsche Bank NV.
- Olszak, M., Pipień, M., Roszkowska, S., Kowalska, I., 2016. What drives heterogeneity of cyclicality of loan loss provisions in the EU? Journal of Financial Services Research. DOI 10.1007/s10693-015-0238-6
- Olszak, M., Pipień, M., Roszkowska, S., 2015. The impact of capital on lending in publicly-traded and privately-held banks in the EU. Faculty of Management Working Paper Series 7/2015. Faculty of Management, University of Warsaw.
- Owualah, S.I., 1999. Banking crisis, reforms, and the availability of credit to Japanese small and medium enterprises, Asian Survey 39(4): 656-667.
- Peek, J., Rosengren, E., 1994. Bank real estate lending and the New England capital crunch. Journal of American Real Estate and Urban Economics Association, 22. DOI: 10.1111/1540-6229.00625.
- Peek, J., Rosengren, E., 1995a. The capital crunch: Neither a borrower nor a lender be. Journal of Money, Credit, and Banking, 27, 625-638..
- Peek, J., Rosengren, E., 1995b. Bank regulation and the credit crunch. Journal of Banking and Finance, 19. DOI:10.1016/0378-4266(94)00148-V.
- Peek, J., Rosengren, E., 1997. The International Transmission of Financial Shocks: The Case of Japan. American Economic Review, 87(4).
- Peek, J., Rosengren, E., 2000. Collateral Damage: Effects of the Japanese Banking Crisis on Real Activity in the United States. American Economic Review, 90(1).
- Peydró, J.-L. (2010). Discussion of The Effects of Bank Capital on Lending: What Do We Know, and What Does It Mean? International Journal of Central Banking. December.
- Roodman, D., 2009. Practitioners Corner: A Note on the Theme of Too Many Instruments, Oxford Bulletin of Economics and Statistics 71, 135-156,DOI: 10.1111/j.1468-0084.2008.00542.x
- Schoenmaker, D., Wierts, P., 2011. Macroprudential Policy: The Need for a Coherent Policy Frameworks. DSF Policy Paper, No. 13.
- Valencia, F., 2008. Banks' Precautionary Capital and Credit Crunch. IMF Working PaperWP/08/248.
- Van den Heuvel, S. J., 2009. The Bank Capital Channel of Monetary Policy, Federal Reserve Board, Working Paper.
- Van den Heuvel, S. J., 2011. Banking Conditions and the Effects of Monetary Policy: Evidence from U.S. States, Federal Reserve Board, Working Paper.
- Van den Heuvel, S.J., 2011. Banking Conditions and the Effects of Monetary Policy: Evidence from U.S., Federal Reserve Board, Working Paper.
- Vandenbussche, J., Vogel, U., Detragiache, E., 2012. Macroprudential Policies and Housing Prices - A New Database and Empirical Evidence for Central, Eastern, and Southeastern Europe. IMF Working Paper12/303.
- Vińals, J., Pazarbasioglu, C., Surti, J., Narain, A., Erbenova, M., Chow, J., 2013. Creating a safer financial system: Will the Volcker, Vickers, and Liikanen structural measures help? IMF Staff Discussion Note 13/04.
- Volk, M., Trefalt, P., 2014. Access to Credit as Growth Constraint. Journal of Banking and Financial Economics, 1(1). DOI: 10.7172/2353-6845.jbfe.2014.1.2.
- Windmeijer, F., 2005. A finite sample correction for the variance of linear efficient two step GMM estimators, Journal of Econometrics, 126(1), 25-51.
- Wong, E., Fong, T., Li, K., Choi, H., 2011. Loan-to-Value Ratio as a Macroprudential Tool-Hong-Kong's Experience and Cross-Country Evidence. HKMA Working Paper, 01/2011 (Hong Kong: Hong Kong Monetary Authority)
- Zhang, L., Zoli, E., 2014. Leaning Against the Wind: Macroprudential Policy in Asia. Journal of Asian Economics, Vol. 42, 33-52. doi:10.1016/j.asieco.2015.11.001