Does bank competition matter for the effects of macroprudential policy on procyclicality of lending?

Competition is an inherent and natural environment under which banks operate and extend loans. Despite the extensive debate on the impact of bank competition on risk-taking and procyclicality, there is no evidence of its role in the effects of macroprudential policy on loans’ growth and on the sensitivity of lending to the business cycle. Using over 70,000 bank-level observations in 109 countries in 2004-2015 we find that increased competition strengthens the countercyclical effects of MPI in terms of reduced loans’ growth. Bank lending is procyclical in perfectly competitive industry. However, any decrease in the intensity of competition in countries not applying macroprudential policy instruments is related with increased procyclicality of lending. Sensitivity of lending to business cycle in countries implementing macroprudential policy depends on the type of macroprudential policy instrument and on the length of the use of instruments. We show that extended duration of use of cyclical macroprudential instruments is associated with increased procyclicality of lending. In a perfectly competitive environment we find increased procyclicality of credit in countries using cyclical instruments and decreased procyclicality of credit in countries applying balance-sheet oriented instruments. Under imperfectly competitive banking sector we find the opposite effects of macroprudential instruments on procyclicality of credit.