Macroprudential Policy and Bank Systemic Risk

47 Pages Posted: 14 May 2019

See all articles by Elien Meuleman

Elien Meuleman

Ghent University - Department of Financial Economics

Rudi Vander Vennet

Ghent University - Department of Financial Economics

Date Written: April 15, 2019

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.

Keywords: European banks, macroprudential policy, systemic risk

JEL Classification: E58, G18, G28

Suggested Citation

Meuleman, Elien and Vander Vennet, Rudi, Macroprudential Policy and Bank Systemic Risk (April 15, 2019). Available at SSRN: https://ssrn.com/abstract=3372331 or http://dx.doi.org/10.2139/ssrn.3372331

Elien Meuleman (Contact Author)

Ghent University - Department of Financial Economics ( email )

Ghent, 9000
Belgium

Rudi Vander Vennet

Ghent University - Department of Financial Economics ( email )

Ghent, 9000
Belgium
+32 9 264 35 13 (Phone)
+32 9 264 35 92 (Fax)

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