Macroprudential Policy, Cyclical Volatility And Banking Sector Resilience

Abstract

This paper examines the effect of macroprudential policies at an economy-wide level on house prices, credit growth, and bank performance across 36 OECD countries from 1990 to 2023. The findings highlight the significant role of tools such as capital requirements, loan-to-value and debt-service-to-income ratios in curbing excessive credit growth and stabilising house prices. Additionally, the study reveals that liquidity-oriented macroprudential tools can enhance banks’ profitability. On the other hand certain tools are found to have effects contrary to stability, such as leading to greater bank risk. To ensure the robustness of findings we perform analysis winsorising our datasets, examining both standalone and combined effects, and investigating the effect of regulation in two subsamples: larger and smaller economies. These results provide valuable insights for policymakers aiming to balance economic and financial stability with sustainable growth.