Macroprudential policy, bank competition and bank risk in East Asia

Abstract

We assess the relation of macroprudential policy and competition to bank risk for a sample of 1373 banks from 13 East Asian countries, using the IMF iMaPP dataset of macroprudential policy from 1990 to 2018. To our knowledge, this is the first paper to include both macroprudential policy and individual bank market power, as well as their interaction, as determinants of bank risk. On the one hand, we find direct effects of both macroprudential policy and competition on risk, in line with the existing literature. On the other hand, we detect important interaction effects. Notably in the developing and emerging East Asian countries, the interactions between competition and macroprudential measures often show a lesser response to such measures in terms of risk reduction for banks with more market power. We suggest that this links in turn to ability of such banks to undertake risk-shifting in response to macroprudential policy. We also find for banks in advanced East Asian countries—and in wider samples—some tendency in the long term for banks facing intense competition to take relatively more risks in face of macroprudential measures, in line with the traditional “franchise value” view of bank competition and risk taking. These findings have important implications for regulators.