Borrower- and lender-based macroprudential policies: What works best against bank systemic risk?

• Published in: Journal of international financial markets, institutions & money institutions & money, 2022-09, Vol.80, p.101648, Article 101648
• Main Authors: Apergis, Nicholas, Aysan, Ahmet F., Bakkar, Yassine
• Format: Article
• Language: English
• Subjects: Complementarity; Financial stability; Macroprudential policies; Monetary policy; Systemic risk
• ISSN: 1042-4431; 1873-0612
• DOI: 10.1016/j.intfin.2022.101648

•The paper shows the complementarity of macroprudential policies in bank systemic risk.•It uses the IMF survey on Global Macroprudential Policy Instruments.•It analyzes financial upturns and downturns.•It assesses the effectiveness of macroprudential policies during calm periods.•The results bear policy implications for optimal macroprudential tools. This paper investigates the complementarity between the different macroprudential policies to contain bank systemic risk. We use a newly updated version of the IMF survey on Global Macroprudential Policy Instruments (GMPI). By disentangling the aggregate macroprudential policy index, we assess the complementarity between borrower-targeted and lender-targeted instruments in mitigating systemic risk arising from intra-financial system vulnerabilities. We investigate the effect of boom-bust cycle on such a relationship by analyzing the financial upturns and downturns and show the effectiveness of the macroprudential policies during calm period. We also show that their efficacy in mitigating instability is quite heterogeneous and may vary depending on the set of tools implemented, as well as bank’ size, TBTF, leverage, liquidity and concentration.Our results bear critical policy implications for implementing optimal macroprudential tools and provide insights into the trade-off between financial vis-à-vis price stability.