Macroprudential Policy, Monetary Policy, and Euro Zone Bank Risk

We investigate the impact of macroprudential policy on the risk and return profile of euro zone banks between 2008 and 2018, conditioning on the stance of monetary policy. Using local projections, we find that a tightening in macroprudential policy increases financial stability by curbing credit growth and increasing the resilience of the banks. With respect to the policy mix, we show that tight macroprudential and monetary policies reinforce each other. But even when monetary policy is accommodating, macroprudential policy is found to be effective in deterring excessive bank risk-taking. However, we also document adverse consequences for bank franchise values.