University Research
The Impact of Capital-Based Macroprudential Policy on Banks’ Balance Sheet Composition
Academic department
Department of Economics
Description
We assess the effects of capital-based macroprudential policy on the composition of banks’ balance sheets. Employing a bank-level panel vector autoregressive model incorporating 188 macroprudential actions across 30 European countries, we analyze the impact of regulatory changes on banking variables while accounting for endogeneity. The results indicate that macroprudential policy shocks positively affect the common equity tier 1 ratio, prompting banks to adjust their asset allocations from higher-risk loans to safer, more liquid assets, thereby reducing risk-weighted assets and increasing the capital ratio. Additionally, regulators demonstrate proactive behavior by raising capital requirements in response to heightened bank lending and profitability. Policymakers should be cautious, as additional capital requirements may lead banks to strengthen their capital positions by reducing risk-weighted assets, potentially diminishing lending and adversely affecting banking profitability and real economy.
Publisher name
Elsevier
Document Type
Article
Digital Object Identifier (DOI) Link
https://doi.org/10.1016/j.econlet.2025.112377
Publication Date
5-23-2025
Publication Title
Economic Letters
Volume
253
First Page
1
Last Page
8
Recommended Citation
Mandas, Macro and Goodell, John W., "The Impact of Capital-Based Macroprudential Policy on Banks’ Balance Sheet Composition" (2025). University Research. 22.
https://ideaexchange.uakron.edu/university_research/22