Page 264 - Special Topic Session (STS) - Volume 3

STS543 Veronica B. B. et al.
performing loans (NPL). Following Chavan and Gambacorta (2016), is a
,
logit function of the ratio of gross NPL to total loans for bank b at time t. In
particular, the logit function is given in equation 6 as,

, = ln [ ] (eq. 6)
1−

Given the perceived persistence of NPL, this study uses a dynamic
specification that includes lagged value of the NPL as an explanatory variable.
The study considers a specification that takes into account the sum of one lag
to four quarter lag effects to capture the total effects in t. Similar to
specifications in equations 1 to 4, the bank-specific characteristics ,−1 in
equation 5 includes the size of a bank (or total resources in real terms), liquidity
ratio, capital ratios using capital adequacy ratio and Common Equity Tier 1
ratio to total assets, funding composition using outstanding deposits relative
to total liabilities, and profitability of banks using real net interest income.
Robustness checks. Diagnostic tests are used to check for normality of
residuals across equations at 1%, 5% and 10% levels of significance. The results
are broadly robust against normality tests and different specifications of
dependent and independent variables. The residual tests show that all
estimated coefficients are significant and that the instruments used are not
correlated with the residuals (using Hansen test). The standard errors of
regression are robust and that the errors in the first difference regression
exhibit no second order serial correlation (using serial correlation test).

3. Results
Following diagnostic and robustness checks, the results reveal important
findings. First, tightening of domestic prudential, particularly those tightening
measures that are meant to preserve resilience of the banking system, are
effective in curbing growth of real bank loan commitments to borrowers for
acquiring new residential properties. The results show that tightening
macroprudential policies have direct and negative impact that can last up to
four quarters on real bank loan commitments to borrowers based on real
acquisition cost of new properties from March 2014 to December 2017.
Importantly, results reveal that tightening domestic macroprudential policies
vary with both business and financial cycles. Overall, these findings confirm
other studies’ observation that prudential policies are more likely to find
effectiveness.
Second, this study highlights the bigger negative impact of tightening
prudential measures on real bank loan commitments to maintain banks’
resilience in by U/KBs compared to TBs, an indication of the presence of bank
lending channel. Third, real bank loan commitments to household borrowers
are driven by bank deposits (relative to total liabilities), liquidity position and

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