The effect of macroprudential policy on banks' profitability

Abstract

We present empirical estimates of effects of macroprudential policies on banks’ profitability, a key aspect of the transmission of macroprudential measures. To our knowledge this analysis has not been undertaken in the research literature to date. The empirical results on a sample of 6,010 global banks suggest that in the sample period, 2000-2013, a number of measures of macroprudential policy such as loan-to-value ratios, debt-to-income ratios, domestic currency loans limits as well as general countercyclical capital buffer had a negative and significant effect on banks’ profitability as measured by return of average assets (ROAA) and return on average equity (ROAE). Furthermore, the effect of macroprudential policy on banks’ profitability varies between advanced and emerging market economies, with some differences also apparent between retail and universal banks. Our results, in combination with the existing literature which focuses on the impact of macroprudential policy on lending, suggest some policies have a comparative advantage over others in terms of their relative impact on profitability and credit, which we contend is of considerable relevance to regulators.