The Impact of Macroprudential Policies on the Vulnerability of the Banking System: Dynamic Panel Model

In the aftermath of the global financial crisis (2007-2009), policymakers in the developing countries and emerging economies have generally relied on macroprudential policies to achieve financial stability. Since the banking systemchr('39')s vulnerability plays an essential role in financial instability, and the banking systemchr('39')s stability is exposed to vulnerability, we examine macroprudential policieschr('39') effectiveness in reducing banking vulnerability and economic instability through containing credit growth. We estimated a dynamic panel for 14 Iranian banks using GMM and Arellano-Bovar / Blundell-bond two-stage estimators during 2009-2018. The results indicate that the increase in lending rates in the interbank market leads to the banking systemchr('39')s contraction of lending capacity. The positive and significant effect of the economic growth index indicates the bankschr('39') procyclical behavior. That financial institutions in the business cycles behave procyclical in lending. The diminishing effect of the macroprudential policy index on the bank credit expansion indicates that macroprudential authority and policy toolschr('39') application reduces the banking systemchr('39')s instability and vulnerability. Therefore, to reduce financial intermediation instability, the financial sector regulator can institutionalize macroprudential policies.