Despite the importance of profitability to banks’ growth and stability, there have, to our knowledge, been no studies which assess the effect of macroprudential regulation on banks’ profitability, a key aspect of the transmission of macroprudential measures. We seek to fill this lacuna with empirical estimates for a sample of 6,010 global banks. These suggest that over 2000-2013, a number of measures of macroprudential policy had a negative and significant effect on banks’ profitability as measured by return of average assets and return on average equity. Furthermore, the effect of macroprudential policy on banks’ profitability varies between advanced and emerging market economies, with some differences also apparent between retail and universal banks.
Assessing our results in combination with existing estimates of the impact of macroprudential policy on credit expansion, some measures such as interbank restrictions, concentration limits and taxes on financial institutions are found to affect lending negatively but not profitability; others, such as loan-to-value ratios, the debt-to-income ratio, domestic currency loan limits and the general countercyclical capital buffer affect both negatively; and some, such as reserve requirements and capital surcharges on SIFIs, affect profitability with no significant effect on lending. Since it is probably desirable for banks to make profits and build up capital from retained earnings, according to our results, the first group are more desirable than the second, and the third is the least desirable.