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The impact of capital-based macroprudential policy on banks’ balance sheet composition

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  • Mandas, Marco
  • Goodell, John W.

Abstract

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.

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  • Mandas, Marco & Goodell, John W., 2025. "The impact of capital-based macroprudential policy on banks’ balance sheet composition," Economics Letters, Elsevier, vol. 253(C).
    • Handle: RePEc:eee:ecolet:v:253:y:2025:i:c:s0165176525002149
    DOI: 10.1016/j.econlet.2025.112377
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    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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