Macroprudential policy and systemic risk: The role of corporate and household credit booms

Abstract

Recent financial crises have once again underscored the critical role of credit booms in driving systemic risk and financial instability in both advanced and developing countries. In this study, I examine whether macroprudential policies can attenuate systemic risk by mitigating the effects of booms in credit. The robust results show that macroprudential instruments are effective in curbing the build-up of systemic risk during household credit booms, which pose significant concerns for financial stability, though not for booms in credit to firms. Moreover, the findings suggest that limits on banks’ sectoral exposures are particularly effective in reducing systemic risk during booms in credit to the household sector. I further discover that leverage is a key transmission channel through which household credit booms contribute to systemic risk.