- We assess the impact of competition between East Asian banks on their response to macroprudential policy in terms of risk taking
- Even abstracting from the effect of competition, not all such policies have an effect of reducing bank risk.
- We find that a bank’s response in terms of risk is not neutral to the degree of market power that a bank has.
- Notably in less developed East Asian markets, banks with market power respond less in terms of risk reduction to macroprudential policy that more competitive banks.
- In more advanced East Asian countries, the tendency is rather for the more competitive banks to take more risk when macroprudential policy tightens. A variant suggests a similar pattern may hold in European countries.
Macroprudential policy – regulatory adjustment across the whole financial sector – has been widely used since the subprime crisis but its economic effects are only gradually being assessed in the research literature. This is to our knowledge the first paper to estimate the degree to which competition among banks affects the risk-reduction effect of macroprudential policy. We focus on banks in East Asian countries that have used such policies for much longer than in most other regions. We find that the effect of such policies varies according to the degree of market power a bank has. Uncompetitive banks may have more scope to avoid such policies by risk shifting, notably in less developed markets. The outcome of our paper warrants close attention by regulators.