MACROPRUDENTIAL POLICY GUIDELINES AND BANKING SYSTEM SOUNDNESS: A HOMOGENOUS CROSS-COUNTRY ANALYSIS OF MACRO-FINANCIAL NEXUS

The relationship between macroprudential policy guidelines and financial stability is indirectly associated with the economy. The association is derived under the assumption that in the absence of elevated systemic vulnerability bank financial intermediation provides uninterrupted supply of liquidity and sustainable workings of payment infrastructure. The current study conducts investigations on globally recognized macro prudential policy instruments vis-à-vis financial soundness of the banking system. Country-level data are collected on a large panel of 102 Middle and Low Incomes countries. All data are available in World Bank, International Monetary Fund, domestic central banks and regional development banks collected in the last 9 years. In addition, Hodrick-Prescott filter is used to construct business cycle observations. Appropriate estimation procedures cover unbalanced panel data analytical technique consisting Ordinary Least Square, Within Group, Generalized Methods of Moments and Two Stage Least square required for instrumental variable. According to baseline regression, current accounts deficits, interest rate and credits boom show disruptive effects on banking system soundness by impairing quality of first-tier common equity. Our result further showed that regulatory governance interaction with macro prudential policy instruments, confirms that regulatory governance is less effective in containing business cycle tendency to damage banking system soundness. Conversely, robust regulation is significantly effective in mitigating credits boom adverse consequences on soundness and stability in some countries banking system.