International Evidence on the Impact of Macro‐Prudential Policies on Bank Systemic Risk

ABSTRACT This paper analyses the impact of macro‐prudential policies on bank systemic risk worldwide. Using data from 63 countries over 2001–2017, I find strong evidence that macro‐prudential policies are effective in reducing systemic risk at the country level. The effectiveness of macro‐prudential policies differs across countries in the sample. Macro‐prudential policies are more effective in reducing systemic risk in countries with more advanced economic development, with a higher degree of concentration in the banking sector, and with less stringent micro‐prudential regulations. Bank‐level evidence suggests that bank size matters. The impact of macro‐prudential policies on constraining bank systemic risk is more pronounced for large banks. Results are robust to the use of instrumental variables to address potential concerns, and to the inclusion of additional controls to account for the impact of alternate tools that might be used to foster financial stability. These results have policy implications for effective conduct of macro‐prudential policies.