Borrower- and lender-based macroprudential policies: What works best against bank systemic risk?

This paper investigates the complementarity between the different macroprudential policies to contain bank systemic risk. We use a newly updated version of the IMF survey on Global Macroprudential Policy Instruments (GMPI). By disentangling the aggregate macroprudential policy index, we assess the complementarity between borrower-targeted and lender-targeted instruments in mitigating systemic risk arising from intra-financial system vulnerabilities. We investigate the effect of boom-bust cycle on such a relationship by analyzing the financial upturns and downturns and show the effectiveness of the macroprudential policies during calm period. We also show that their efficacy in mitigating instability is quite heterogeneous and may vary depending on the set of tools implemented, as well as bank’ size, TBTF, leverage, liquidity and concentration. Our results bear critical policy implications for implementing optimal macroprudential tools and provide insights into the trade-off between financial vis-à-vis price stability.