The effect of macroprudential regulation on banks’ profitability during financial crises

Abstract

This study aims to investigate the effect of macroprudential regulation on banks’ profitability during financial crises, to find out whether the instruments of the Central Bank of Jordan (CBJ) enhance the performance of the Jordanian banking sector in terms of increasing banks’ profitability and reducing banking sector exposure to financial crisis vulnerability. The sample of the study consists of twelve listed banks in Jordan over the period 2000–2018. The bank’s return on assets (ROA) was regressed on instruments by using the fully modified ordinary least square (FMOLS) method. The results had shown a slightly weak significant effect of stress testing (ST) on the banks’ ROA. Capital adequacy ratio (CAR) had no significant effect, leverage ratio had the deepest effect, and banks are highly leveraged with more debt-to-equity ratio. In addition to that, a good number of the banks maintain CAR, loan-to-value (LTV), and leverage ratios higher than the minimum limit required by the CBJ and Basel requirements, suggesting that the Basel standards did not take into consideration the particularity of some countries. The results also revealed that CBJ prudential regulation instruments are succeed in keeping the stability of the banking sector profitability during previous financial crises, but still need to enhance the level of gearing for banks against future shocks