The effects of macroprudential policies on credit growth

Abstract

In this paper, we assess the effectiveness of macroprudential policies in controlling short- and long-term credit growth. Using a sample of 414 banks located in 61 countries, we document that macroprudential policies manifest a stabilizing effect in the short run, reducing credit growth, with borrower-targeted macroprudential policies being the most effective in taming credit developments. However, in the long-term tight macroprudential policies enhance credit growth. In this case, country-level analysis shows that financial institution-targeted macroprudential policy is more effective than the instruments that target borrowers, whereas at the bank-level the opposite is true. In addition, using a difference-in-difference approach, we emphasize that there is heterogeneity in the relationship among macroprudential policy and credit growth across different types of countries, banking systems, policy regimes and banks. Our findings stress the importance of macroprudential instruments in limiting excessive lending, most notably borrower-based tools.

Keywords:

• macroprudential policy
• credit growth
• banking
• financial development

JEL Classifications:

• E58
• G01
• G21
• G28
• H81

Acknowledgements

We thank Hans Degryse, Roman Goncharenko, Samu Karkkainen, Ion Lapteacru, Simona Nistor, Steven Ongena, Francisco Nadal de Simone and participants at the 2019 Annual International Conference on Macroeconomic Analysis & International Finance (Crete), 2019 Bordeaux Workshop in International Economics and Finance (Bordeaux), FIBA 2019 (Bucharest) and 2018 ERMAS (Iaşi) for their valuable comments and participants at the research seminar from the Romanian Academy and Bank of Finland.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 For a survey, see Galati and Moessner (2018).

2 Although the term dates back to the 1970s (BIS 2018), ‘Yet the term [macroprudential] was little used before the crisis, and its meaning remains obscure’ (Clement 2010).

3 For details on micro- and macroprudential policies implemented by developing and developed economies, see, e.g. Galati and Moessner (2013), Claessens (2015) and Freixas, Laeven, and Peydró (2015).

4 Other consistent estimators are Anderson-Hsiao (Anderson and Hsiao 1982) and Arellano-Bond (Arellano and Bond 1991).

5 Ticker G#LBANKSWD.

6 Global Systemically Important Banks (G-SIBs) are required to hold additional capital buffers based on the bucket they are part of (2.5%, 2.0%, 1.5% and 1% of their risk-weighted assets, respectively).

7 Bank stability is captured by the Z-score which is a proxy for financial stability and is inversely related to the probability of bank default.

8 Marginal effects are computed using the Bonferroni adjustment.

Additional information

Funding

This work was supported by a grant of the Ministry of Research, Innovation and Digitization, CNCS/CCCDI – UEFISCDI, project number PN-III-P1-1.1-TE-2019-1522, within PNCDI III.