Skip to main content
SpringerLink
Log in

Macro-prudential regulations and systemic risk: the role of country-level governance indicators

  • Original Article
  • Published:
Journal of Banking Regulation Aims and scope Submit manuscript

Abstract

This paper empirically examines the moderating role of country-level governance indicators (CGIs) in the relationship between macro-prudential policy instruments (MPI) and systemic risk. Results from 68 countries, during the period 2000–2017, show that CGIs in terms of corruption controls, government effectiveness, regulatory quality, and rule of law play a negative moderating role in the MPI-systemic risk nexus. Countries scoring high (low) on these CGIs experience stability benefits (instability costs) from MPIs. These findings suggest that the mere implementation of macro-prudential regulations may not perform the intended function of systemic stability. Overall, institutional development in a country’s governance ecosystem is necessary; hence, a coordinated effort is required from all the stakeholders of the country.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Anonymous.

  2. The data is available until 2017 deciding the cutoff point of our sample period.

  3. For further discussion, please refer Rizwan [75].

  4. These levels are decided based upon yearly quartiles of these indicators with quartile 1 being low level, quartiles 2 and 3 as medium, and quartile 4 as high level.

  5. We used time-variant income classification of countries provided by The World Bank.

References

  1. Agénor, P.-R., and L.A. Silva. 2014. Macroprudential regulation and the monetary transmission mechanism. Journal of Financial Stability 13: 44–63.

    Article  Google Scholar 

  2. Ahamed, M.M., and S. Mallick. 2017. Does regulatory forbearance matter for bank stability? Evidence from creditors’ perspective. Journal of Financial Stability 28: 163–180.

    Article  Google Scholar 

  3. Ahmad, G., M.S. Rizwan, and D. Ashraf. 2021. Systemic risk and macroeconomic forecasting: A globally applicable copula-based approach. Journal of Forecasting 40 (8): 1420–1443.

    Article  Google Scholar 

  4. Ahnert, T., K. Forbes, C. Friedrich, and D. Reinhardt. 2021. Macroprudential FX regulations: shifting the snowbanks of FX vulnerability? Journal of Financial Economics 140 (1): 145–174.

    Article  Google Scholar 

  5. Ailian, Z., P. Mengmeng, L. Bai, and W. Yin-Che. 2020. Systemic risk: the coordination of macroprudential and monetary policies in China. Economic Modelling 93: 415–429.

    Article  Google Scholar 

  6. Akerlof, G.A., P.M. Romer, R.E. Hall, and N.G. Mankiw. 1993. Looting: The economic underworld of bankruptcy for profit. Brookings Papers on Economic Activity 1993 (2): 1–73.

    Article  Google Scholar 

  7. Ali, M.S., F. Fhima, and R. Nouira. 2020. How does corruption undermine banking stability? A threshold nonlinear framework. Journal of Behavioral and Experimental Finance 27: 100365.

    Article  Google Scholar 

  8. Allen, F., and A.M. Santomero. 1997. The theory of financial intermediation. Journal of Banking Finance 21 (11–12): 1461–1485.

    Article  Google Scholar 

  9. Allen, L., T.G. Bali, and Y. Tang. 2012. Does systemic risk in the financial sector predict future economic downturns? Review of Financial Studies 25 (10): 3000–3036.

    Article  Google Scholar 

  10. Altunbas, Y., B. Mahir, and G. Leonardo. 2018. Macroprudential policy and bank risk. Journal of International Money and Finance 81: 203–220.

    Article  Google Scholar 

  11. Amenta, E., and K.M. Ramsey. 2010. Institutional theory. In Handbook of politics: state and society in global perspective, 15–39. Berlin: Springer.

    Chapter  Google Scholar 

  12. Antzoulatos, A.A., and C. Tsoumas. 2014. Institutions, moral hazard and expected government support of banks. Journal of Financial Stability 15: 161–171.

    Article  Google Scholar 

  13. Asteriou, D., K. Pilbeam, and I. Tomuleasa. 2021. The impact of corruption, economic freedom, regulation and transparency on bank profitability and bank stability: Evidence from the Eurozone area. Journal of Economic Behavior and Organization 184: 150–177.

    Article  Google Scholar 

  14. Athanasoglou, P.P., I. Daniilidis, and D. Delis. 2014. Bank procyclicality and output: Issues and policies. Journal of Economics and Business 72: 58–83.

    Article  Google Scholar 

  15. Bahoo, S. 2020. Corruption in banks: A bibliometric review and agenda. Finance Research Letters 35: 101499.

    Article  Google Scholar 

  16. Bassett, W.F., and W.B. Marsh. 2017. Assessing targeted macroprudential financial regulation: the case of the 2006 commercial real estate guidance for banks. Journal of Financial Stability 30: 209–228.

    Article  Google Scholar 

  17. Bencivenga, V.R., and B.D. Smith. 1991. Financial intermediation and endogenous growth. The Review of Economic Studies 58 (2): 195–209.

    Article  Google Scholar 

  18. Benkraiem, R., A. Uyar, M. Kilic, and F. Schneider. 2021. Ethical behavior, auditing strength, and tax evasion: A worldwide perspective. Journal of International Accounting, Auditing and Taxation. https://doi.org/10.1016/j.intaccaudtax.2021.100380.

    Article  Google Scholar 

  19. Benoit, S., J.E. Colliard, C. Hurlin, and C. Pérignon. 2017. Where the risks lie: a survey on systemic risk. Review of Finance 21 (1): 109–152.

    Article  Google Scholar 

  20. Bluhm, M., and J.P. Krahnen. 2014. Systemic risk in an interconnected banking system with endogenous asset markets. Journal of Financial Stability 13: 75–94.

    Article  Google Scholar 

  21. Bullard, J., C.J. Neely, and D.C. Wheelock. 2009. Systemic risk and the financial crisis: a primer. Federal Reserve Bank of St. Louis Review 91: 403–417.

    Google Scholar 

  22. Calomiris, C.W., and C.M. Kahn. 1991. The role of demandable debt in structuring optimal banking arrangements. The American Economic Review 81: 497–513.

    Google Scholar 

  23. Campbell, T.S., and W.A. Kracaw. 1980. Information production, market signalling, and the theory of financial intermediation. The Journal of Finance 35 (4): 863–882.

    Article  Google Scholar 

  24. Cerutti, E., S. Claessens, and L. Laeven. 2017. The use and effectiveness of macroprudential policies: New evidence. Journal of Financial Stability 28: 203–224.

    Article  Google Scholar 

  25. Charnock, G. 2009. Why do institutions matter? Global competitiveness and the politics of policies in Latin America. Capital and Class 33 (2): 67–99.

    Article  Google Scholar 

  26. Chuluun, T. 2015. The role of underwriter peer networks in IPOs. Journal of Banking and Finance 51: 62–78.

    Article  Google Scholar 

  27. Cornand, C., and C. Gimet. 2012. The 2007–2008 financial crisis: is there evidence of disaster myopia? Emerging Markets Review 13: 301–315.

    Article  Google Scholar 

  28. Davis, E.P., and D. Karim. 2020. Macroprudential regulation—the missing policy pillar. National Institute Economic Review 211: 3–16.

    Article  Google Scholar 

  29. Diamond, D.W., and P.H. Dybvig. 1983. Bank runs, deposit insurance, and liquidity. Journal of Political Economy 91 (3): 401–419.

    Article  Google Scholar 

  30. Dutra, T.M., J.C. Teixeira, and J.C. Dias. 2023. The effect of political institutions on the interplay between banking regulation and banks’ risk. Journal of Banking Regulation. https://doi.org/10.1057/s41261-023-00225-8.

    Article  Google Scholar 

  31. Ely, R.A., B.M. Tabak, and M. Teixeira. 2021. The transmission mechanisms of macroprudential policies on bank risk. Economic Modelling 94: 598–630.

    Article  Google Scholar 

  32. English, M., and W. Shahin. 1994. Investigating the interest rate impact of changing secret bank deposit laws: Switzerland. Journal of Banking and Finance 18 (3): 461–475.

    Article  Google Scholar 

  33. Entrop, O., C. Memme, B. Ruprecht, and M. Wilkens. 2015. Determinants of bank interest margins: impact of maturity transformation. Journal of Banking and Finance 54: 1–19.

    Article  Google Scholar 

  34. Evans, C. L. 2010. Some perspectives on regulatory reform proposals. Remarks at the Institute of Regulation & Risk North Asia 30

  35. Fendoğlu, S. 2017. Credit cycles and capital flows: Effectiveness of the macroprudential policy framework in emerging market economies. Journal of Banking & Finance 79: 110–128.

    Article  Google Scholar 

  36. Fernando, C., V. Gatchev, A. May, and W. Megginson. 2015. Prestige without purpose? reputation, differentiation, and pricing in U.S. equity underwriting. Journal of Corporate Finance 32: 41–63.

    Article  Google Scholar 

  37. Gaganis, C., E. Galariotis, F. Pasiouras, and C. Staikouras. 2021. Macroprudential regulations and bank profit efficiency: International evidence. Journal of Regulatory Economics 59: 136–160.

    Article  Google Scholar 

  38. Galati, G., and R. Moessner. 2013. Macroprudential Policy– Literature review. Journal of Economic Surveys 27 (5): 846–878.

    Article  Google Scholar 

  39. Galbis, V. 2007. Financial intermediation and economic growth in less-developed countries: A theoretical approach. The Journal of Development Studies 13: 58–72.

    Article  Google Scholar 

  40. Gazdar, K., and M. Cherif. 2015. Institutions and the finance–growth nexus: Empirical evidence from MENA countries. Borsa Istanbul Review 15 (3): 137–160.

    Article  Google Scholar 

  41. Genta-Fons, T. 2007. Challenges of the law and development practitioner. The International Lawyer 41 (1): 27–64.

    Google Scholar 

  42. Giglio, S., K. Bryan, and P. Seth. 2016. Systemic risk and the macroeconomy: An Empirical Evaluation. Journal of Financial Economics 119 (3): 457–471.

    Article  Google Scholar 

  43. Goldin, I., and T. Vogel. 2010. Global governance and systemic risk in the 21st century: Lessons from the financial crisis. Global Policy 1 (1): 4–15.

    Article  Google Scholar 

  44. Hancock, D. 2019. Evolving micro-and macroprudential regulations in the United States: A primer. Global Finance Journal 39 (C): 3–9.

    Article  Google Scholar 

  45. Hanson, S.G., A.K. Kashyap, and J.C. Stein. 2011. A macroprudential approach to financial regulation. Journal of Economic Perspectives 25 (1): 3–28.

    Article  Google Scholar 

  46. Hantke-Domas, M. 2003. The public interest theory of regulation: Non-existence or misinterpretation? European Journal of Law and Economics 15: 165–194.

    Article  Google Scholar 

  47. Hao, C. 2006. Development of financial intermediation and economic growth: The Chinese experience. China Economic Review 17: 347–362.

    Article  Google Scholar 

  48. Hartmann, P., O. De Bandt, P. Molyneux, and J. Wilson. 2009. The concept of systemic risk. Financial Stability Review 2006: 134–142.

    Google Scholar 

  49. Hasanov, R., and P.S. Bhattacharya. 2019. Do political factors influence banking crisis? Economic Modeling 76: 305–318.

    Article  Google Scholar 

  50. Henderson, B., and H. Tookes. 2012. Do investment banks’ relationships with investors impact pricing? the case of convertible bond issues. Management Science 58 (12): 2272–2291.

    Article  Google Scholar 

  51. Hou, X., S. Li, P. Guo, and Q. Wang. 2018. The cost effects of shadow banking activities and political intervention: Evidence from the banking sector in China. International Review of Economics and Finance 57: 307–318.

    Article  Google Scholar 

  52. Huang, R., Z. Shangguan, and D. Zhang. 2008. The networking function of investment banks: Evidence from private investments in public equity. Journal of Corporate Finance 14 (5): 738–752.

    Article  Google Scholar 

  53. Ibrahim, M.H. 2016. Business cycle and bank lending procyclicality in a dual banking system. Economic Modelling 55: 127–134.

    Article  Google Scholar 

  54. Jääskeläinen, M., and M. Maula. 2014. Do networks of financial intermediaries help reduce local bias? Evidence from cross-border venture capital exits. Journal of Business Venturing 29: 704–721.

    Article  Google Scholar 

  55. Kanas, A., and P.D. Zervopoulos. 2021. Systemic risk, real GDP growth, and sentiment. Review of Quantitative Finance and Accounting 57: 461–485.

    Article  Google Scholar 

  56. Karmakar, S. 2016. Macroprudential regulation and macroeconomic activity. Journal of Financial Stability 25: 166–178.

    Article  Google Scholar 

  57. Kouretas, G.P., M. Pawłowska, and G. Szafrański. 2020. Market structure and credit procyclicality: Lessons from loan markets in the European union banking sectors. Economic Modelling 93: 27–50.

    Article  Google Scholar 

  58. Lambertini, L., C. Mendicino, and M.T. Punzi. 2013. Leaning against boom–bust cycles in credit and housing prices. Journal of Economic dynamics and Control 37 (8): 1500–1522.

    Article  Google Scholar 

  59. Angbazo, L. 1997. Commercial bank net interest margins, default risk, interest-rate risk, and off-balance sheet banking. Journal of Banking & Finance 21 (1): 55–87.

    Article  Google Scholar 

  60. Lin, J.-R., H. Chung, M.-H. Hsieh, and S. Wu. 2012. The determinants of interest margins and their effect on bank diversification: Evidence from Asian banks. Journal of Financial Stability 8 (2): 96–106.

    Article  Google Scholar 

  61. López-Espinosa, G., A. Moreno, and F.P. Gracia. 2011. Banks’ net interest margin in the 2000s: A macro-accounting international perspective. Journal of International Money and Finance 30 (6): 1214–1233.

    Article  Google Scholar 

  62. Meeks, R. 2017. Capital regulation and the macroeconomy: Empirical evidence and macroprudential policy. European Economic Review 95: 125–141.

    Article  Google Scholar 

  63. Mertzanis, C. 2020. Financial supervision structure, decentralized decision-making and financing constraints. Journal of Economic Behavior & Organization 174: 13–17.

    Article  Google Scholar 

  64. Meuleman, E., and R. Vander Vennet. 2020. Macroprudential policy and bank systemic risk. Journal of Financial Stability 47: 100724.

    Article  Google Scholar 

  65. Nakatani, R. 2020. Macroprudential policy and the probability of a banking crisis. Journal of Policy Modeling 42: 1169–1186.

    Article  Google Scholar 

  66. Neef, H.Ö.-D., and A. Schandlbauer. 2020. Procyclical leverage: Evidence from banks’ lending and financing decisions. Journal of Banking & Finance 113: 1–15.

    Google Scholar 

  67. North, D.C. 1990. Institutions, institutional change and economic performance. Cambridge: Cambridge University Press.

    Book  Google Scholar 

  68. Omori, S. 2023. Do institutions matter? Political economy of the enhancement of banking supervision. Journal of Banking Regulation. https://doi.org/10.1057/s41261-023-00215-w.

    Article  Google Scholar 

  69. Ouyang, A.Y., and S. Guo. 2019. Macro-prudential policies, the global financial cycle and the real exchange rate. Journal of International Money and Finance 96: 147–167.

    Article  Google Scholar 

  70. Ozge, A., and O.-R. Jane. 2018. How effective are macroprudential policies? An empirical investigation. Journal of Financial Intermediation 33: 33–57.

    Article  Google Scholar 

  71. Ozili, P.K. 2019. Bank income smoothing, institutions and corruption. Research in International Business and Finance 49: 82–99.

    Article  Google Scholar 

  72. Papadimitri, P., F. Pasiouras, G. Pescetto, and A. Wohlschlegel. 2021. Does political influence distort banking regulation? Evidence from the US. Journal of Financial Stability 53: 100835.

    Article  Google Scholar 

  73. Poledna, S., S. Martínez-Jaramillo, and T.S. FabioCaccioli. 2021. Quantification of systemic risk from overlapping portfolios in the financial system. Journal of Financial Stability. https://doi.org/10.1016/j.jfs.2020.100808.

    Article  Google Scholar 

  74. Qureshi, A., M.S. Rizwan, G. Ahmad, and D. Ashraf. 2022. Russia–Ukraine war and systemic risk: Who is taking the heat? Finance Research Letters 48: 103036.

    Article  Google Scholar 

  75. Rizwan, M.S. 2021. Macroprudential regulations and systemic risk: Does the one-size-fits-all approach work? Journal of International Financial Markets, Institutions & Money,. https://doi.org/10.1016/j.intfin.2021.101409.

    Article  Google Scholar 

  76. Rizwan, M.S., G. Ahmad, and D. Ashraf. 2020. Systemic risk: The impact of COVID-19. Finance Research Letters 36: 101682.

    Article  Google Scholar 

  77. Rizwan, M.S., G. Ahmad, and D. Ashraf. 2022. Systemic risk, Islamic banks, and the COVID-19 pandemic: An empirical investigation. Emerging Markets Review 51: 100890.

    Article  Google Scholar 

  78. Rubio, M., and J.A. Carrasco-Gallego. 2016. The new financial regulation in Basel III and monetary policy: A macroprudential approach. Journal of Financial Stability 26: 294–305.

    Article  Google Scholar 

  79. Sahibzada, I.U., M.S. Rizwan, and A. Qureshi. 2022. Impact of sovereign credit ratings on systemic risk and the moderating role of regulatory reforms: An international investigation. Journal of Banking & Finance 145: 106654.

    Article  Google Scholar 

  80. Sami, M., B. Ali, F. Fhima, and R. Nouira. 2017. How does corruption undermine banking stability? A threshold nonlinear framework. Journal of Behavioral Finance. https://doi.org/10.1016/j.jbef.2020.100365.

    Article  Google Scholar 

  81. Sevena, Ü., and H. Yetkinerb. 2016. Financial intermediation and economic growth: Does income matter? Economic Systems 40: 39–58.

    Article  Google Scholar 

  82. Shahidul Islam, M., and S.-I. Nishiyama. 2016. The determinants of bank net interest margins: A panel evidence from south Asian countries. Research in International Business and Finance 37: 501–514.

    Article  Google Scholar 

  83. Shahin, W.N. 1996. Could financial liberalization ignore informal finance? A commentary. Savings and Development 20: 105–116.

    Google Scholar 

  84. Sharpe, S.A. 1990. Asymmetric information, bank lending and implicit contracts: A stylized model of customer relationships. The Journal of Finance 45: 1069–1087.

    Google Scholar 

  85. Suh, S. 2019. Asset correlation and bank capital regulation: A macroprudential perspective. International Review of Economics & Finance 62: 355–378.

    Article  Google Scholar 

  86. Singh, D., and LaBrosse, J. R. 2011. Developing a framework for effective financial crisis management. Financial Market Trends 2: 125–154.

  87. Tao, Y. 2020. China’s anti-corruption campaign and bank loan loss provisions: Evidence from a quasi-natural experiment. Economic Letters 196: 109505.

    Article  Google Scholar 

  88. Tayler, W.J., and R. Zilberman. 2016. Macroprudential regulation, credit spreads and the role of monetary policy. Journal of Financial Stability 26: 144–158.

    Article  Google Scholar 

  89. Uddin, A., M.A. Chowdhury, S.D. Sajib, and M. Masih. 2020. Revisiting the impact of institutional quality on post-GFC bank risk-taking: Evidence from emerging countries. Emerging Markets Review 42: 100659.

    Article  Google Scholar 

  90. Vodenska, I., H. Aoyama, A.P. Becker, Y. Fujiwara, H. Iyetomi, and E. Lungu. 2020. From stress testing to systemic stress testing: The importance of macroprudential regulation. Journal of Financial Stability 52: 1–25.

    Google Scholar 

  91. Wang, M., and X. Sun. 2019. Identity of large owner, regulation and bank risk in developing countries. Journal of International Financial Markets, Institutions and Money 59: 106–133.

    Article  Google Scholar 

  92. Williams, J.C. 2015. Macroprudential policy in a microprudential world. FRBSF Economic Letter 18: 1–7.

    Google Scholar 

  93. Yener, A., B. Mahir, and G. Leonardo. 2018. Macroprudential policy and bank risk. Journal of International Money and Finance 81: 203–220.

    Article  Google Scholar 

Download references

Acknowledgements

We are thankful to Dr. Dawood Ashraf and Dr. Ghufran Ahmad for their helpful comments and suggestions on the initial drafts of the paper. We are grateful to the participants of the World Finance Conference (2023), Norway, and the 63rd Faculty Research Interest Seminar (FRIS) of the College of Banking and Financial Studies (CBFS), Oman, for their valuable suggestions. We are also thankful to Prof. Dalvinder Singh (Editor) and two anonymous reviewers for their comments and suggestions that enabled us to improve the quality of this paper considerably. Views expressed in the article belong to the authors and not the organizations they serve. Errors and omissions, if any, are the responsibility of the authors.

Author information

Authors and Affiliations

  1. College of Banking and Financial Studies, Muscat, Oman

    Muhammad Suhail Rizwan

  2. NUST Business School (NBS), National University of Sciences and Technology (NUST), Islamabad, Pakistan

    Muhammad Suhail Rizwan

  3. School of Business Studies, Institute of Business Administration (IBA), Karachi, Pakistan

    Anum Qureshi

  4. Faculty of Business and Digital Technologies, Department of Economics, Finance and Accounting, University of Winchester, Winchester, UK

    Irfan Ullah Sahibzada

Authors
  1. Muhammad Suhail Rizwan
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Anum Qureshi
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Irfan Ullah Sahibzada
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Muhammad Suhail Rizwan.

Ethics declarations

Conflict of interest

On behalf of all authors, the corresponding author states that there is no conflict of interest.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendices

Appendix 1

See Table

Table 9 This table provides the list of countries included in the sample
Full size table

9

Appendix 2

See Table

Table 10 Variable abbreviations with explanation
Full size table

10

Appendix 3

See Table

Table 11 World bank worldwide governance indicators.
Full size table

11

Rights and permissions

Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Rizwan, M.S., Qureshi, A. & Sahibzada, I.U. Macro-prudential regulations and systemic risk: the role of country-level governance indicators. J Bank Regul (2023). https://doi.org/10.1057/s41261-023-00231-w

Download citation

  • Accepted:

  • Published:

  • DOI: https://doi.org/10.1057/s41261-023-00231-w

Keywords

Search

Navigation