Macroprudential Policy and the Risk Exposure of Commercial Banks

Abstract

This paper evaluates the effectiveness of macroprudential policy in reducing commercial banks' risk exposure in Iran. In this study, an empirical model is developed using dynamic panel data techniques and the generalized method of moments (GMM) estimator to examine the impact of macroprudential policy on the risk-taking behavior of Iranian banks during the period 2010-2024. The analysis evaluates the potential effects of four macroprudential instruments aligned with policy objectives: the loan-to-income ratio (LTI), the loan-to-deposit ratio (LTD), the leverage ratio (LVR), and liquidity requirements (LIQ). As a result of stronger macroprudential oversight, commercial banks are significantly less likely to take on risk. In the context of financial sanctions and Iran's unique economic environment, macroprudential tools remain highly effective in mitigating banking risks. As such, LTD instruments have a time lag, whereas LVR instruments have an immediate impact on risk. Additionally, no single instrument is more effective than the composite macroprudential index at reducing risk-taking. A more secure, less vulnerable banking system in Iran is possible through macroprudential policies, as the results show.