How Does Macroprudential Policy Impact Bank Risk-Taking and Profitability: Evidence from Indian Commercial Banks

This study analyses the impact of macroprudential policy (MaPP) on Indian banks' risk-taking and profitability. Using commercial bank data from 2004-05 to 2019-20, the risk-taking is measured by Z-score, and loan loss provision and profitability by return on average assets and return on average equity, respectively. Employing the panel system-GMM technique, the study finds. (1) MaPP mitigates bank risk-taking by enhancing the bank's stability and reducing the procyclicality of loan loss provisions. (2) MaPP is found to have a positive impact on bank profitability. (3) MaPP is found to be more effective in the context of private and foreign banks as compared to nationalized banks. (4) Within the macroprudential toolkit, reserve requirements and risk-weights are found to have a positive impact on risk-taking and profitability, whereas provisioning requirements are found to have a negative impact.