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The effects of macroprudential policy on banks' profitability

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  • Davis, E. Philip
  • Karim, Dilruba
  • Noel, Dennison

Abstract

We estimate the effects of macroprudential policy on bank profitability, using a sample of 7250 global banks over 1990–2018. A number of policy measures have a negative impact on profitability, but these effects vary according to countries' economic development, bank type and time period. Macroprudential policy also adversely affects profitability of small and highly capitalised banks more than larger and less capitalised banks. Comparing our results with existing estimates of the impact of macroprudential policy on credit expansion, some measures are found to reduce lending but not profitability; others affect both negatively; and some affect profitability with no significant effect on lending. Since it is desirable for banks to make profits and thus be able to build up capital from retained earnings, our results suggest that care is needed in choosing measures according to their effects on bank profitability.

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  • Davis, E. Philip & Karim, Dilruba & Noel, Dennison, 2022. "The effects of macroprudential policy on banks' profitability," International Review of Financial Analysis, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:finana:v:80:y:2022:i:c:s1057521921003057
    DOI: 10.1016/j.irfa.2021.101989
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    More about this item

    Keywords

    Macroprudential policy; Bank profitability; Return of average assets; Return on average equity;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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