Bank Competition and the Effects of Macroprudential Policy on Procyclicality of Lending

UW Faculty of Management Working Paper Series, No 8/2019

53 Pages Posted: 25 Oct 2019

See all articles by Iwona Kowalska

Iwona Kowalska

University of Warsaw - Faculty of Management

Małgorzata Olszak

University of Warsaw - Faculty of Management

Date Written: October 17, 2019

Abstract

Despite the extensive debate on the effects of bank competition on risk-taking and procyclicality, there is no evidence of its role in the effects of macroprudential policy on loans’ growth and on the sensitivity of lending to the business cycle. We contribute to the literature by investigating the impact of bank competition on the effects of individual macroprudential tools in a sample covering over 70,000 bank-level observations in 109 countries from 2004 to 2015. Our results are in line with the competition-fragility hypothesis and suggest that increased market power is associated with enhanced loans’ growth in countries in which macroprudential policy is effective in reducing credit growth and with decreased credit growth for instruments that are not effective in diminishing lending. We also find support for the view that increased market power in the banking sector helps to achieve reduced sensitivity of lending to the business cycle in countries that apply cyclical macroprudential instruments due to increased risk-taking in the banking sector. Moreover, we show that, for countries in which macroprudential policy is associated with reduced procyclicality of lending, some degree of market power is beneficial for bank lending, as it tames the excessive countercyclicality of credit.

Keywords: loans growth, macroprudential policy, competition intensity, procyclicality of lending

JEL Classification: E32, G21, G28, G32

Suggested Citation

Kowalska, Iwona and Olszak, Małgorzata, Bank Competition and the Effects of Macroprudential Policy on Procyclicality of Lending (October 17, 2019). UW Faculty of Management Working Paper Series, No 8/2019 . Available at SSRN: https://ssrn.com/abstract=3471170 or http://dx.doi.org/10.2139/ssrn.3471170

Iwona Kowalska

University of Warsaw - Faculty of Management ( email )

1/3 Szturmowa Street 02-678
Warsaw
Poland

Małgorzata Olszak (Contact Author)

University of Warsaw - Faculty of Management ( email )

1/3 Szturmowa Street 02-678
Warsaw
Poland

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