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From Subprime Loans to Subprime Growth? Evidence for the Euro Area

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  • Martin Cihák
  • Petya Koeva Brooks
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    Abstract

    The global financial crisis has highlighted the potential of financial conditions for influencing real economic activity. We examine the linkages between the financial and real sectors in the euro area, finding that (i) bank loan supply responds negatively to declines in bank soundness; (ii) a cutback in bank loan supply has a negative impact on economic activity; (iii) a positive shock to the corporate bond spread lowers industrial output; and (iv) risk indicators for the banking, corporate, and public sectors show an improvement beginning in 2002–03, followed by a major deterioration since 2007. These estimates imply that the currently estimated bank losses would subtract some 2 percentage points from the euro area output (but with considerable uncertainty around the estimates).

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/69.

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    Length: 35
    Date of creation: 01 Mar 2009
    Date of revision:
    Handle: RePEc:imf:imfwpa:09/69

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    Keywords: Financial sector; Credit risk; Banking; Interest rates; Financial risk; Economic models; bond; bank lending; corporate bond; bank loan; bank loans; bank credit; bond spread; banking sector; money market; bonds; probability of default; financial stability; banking system; deposit rates; excess demand; bond spreads; financial institutions; government bond; bondholders; sovereign risk; bond yield; net interest margin; international reserves; government bond yield; bond market; nonperforming loan; present value; equity market; bank soundness; bond financing; recapitalization; corporate bonds; bank funding; bank losses; financial market; sovereign bond; stock price; high yield bond; risk-free interest rate; equity shares; financial markets; deposit rate; financial intermediation; coupon bond; stock market; bond rate; bank size; money market rate; bank assets; bank equity; bank data; corporate bond financing; net present value; banks ? balance sheets; bond issuance; banking crisis; segmentation; bank for international settlements; bank financing; bankers; financial structure; stock prices; financial structures; financial instruments;

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    1. Altunbas, Yener & Fazylov, Otabek & Molyneux, Philip, 2002. "Evidence on the bank lending channel in Europe," Journal of Banking & Finance, Elsevier, vol. 26(11), pages 2093-2110, November.
    2. Bruggeman, Annick & Donnay, Marie, 2003. "A monthly monetary model with banking intermediation for the euro area," Working Paper Series 0264, European Central Bank.
    3. Ignazio Angeloni & Michael Ehrmann, 2003. "Monetary transmission in the euro area: early evidence," Economic Policy, CEPR & CES & MSH, vol. 18(37), pages 469-501, October.
    4. Matteo Iacoviello & Raoul Minetti, 2002. "The Credit Channel of Monetary Policy: Evidence from the Housing Market," Boston College Working Papers in Economics 541, Boston College Department of Economics, revised 29 Aug 2003.
    5. Jesper Berg & Annalisa Ferrando & Gabe de Bondt & Silvia Scopel, 2005. "The bank lending survey for the euro area," Occasional Paper Series 23, European Central Bank.
    6. Martin CIHAK, 2007. "Systemic Loss: A Measure of Financial Stability (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 57(1-2), pages 5-26, March.
    7. Adolfo Barajas & Roberto Steiner, 2002. "Credit Stagnation in Latin America," IMF Working Papers 02/53, International Monetary Fund.
    8. Tigran Poghosyan & Martin Cihák, 2009. "Distress in European Banks," IMF Working Papers 09/9, International Monetary Fund.
    9. Mody, Ashoka & Taylor, Mark P., 2004. "Financial predictors of real activity and the financial accelerator," Economics Letters, Elsevier, vol. 82(2), pages 167-172, February.
    10. Driscoll, John C., 2004. "Does bank lending affect output? Evidence from the U.S. states," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 451-471, April.
    11. Jorge A. Chan-Lau & Iryna V. Ivaschenko, 2002. "The Corporate Spread Curve and Industrial Production in the United States," IMF Working Papers 02/8, International Monetary Fund.
    12. Dale F. Gray; & Robert C. Merton & Zvi Bodie, 2009. "New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability," Working Papers Central Bank of Chile 541, Central Bank of Chile.
    13. Gertler, Mark & Lown, Cara S, 1999. "The Information in the High-Yield Bond Spread for the Business Cycle: Evidence and Some Implications," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 132-50, Autumn.
    14. Jan Kakes & Jan-Egbert Sturm, 2001. "Monetary policy and bank lending. Evidence from German banking groups," MEB Series (discontinued) 2001-1, Netherlands Central Bank, Monetary and Economic Policy Department.
    15. Brad Setser & Nouriel Roubini & Christian Keller & Mark Allen & Christoph B. Rosenberg, 2002. "A Balance Sheet Approach to Financial Crisis," IMF Working Papers 02/210, International Monetary Fund.
    16. Dale F. Gray & Elena Loukoianova & Samuel W. Malone & Cheng Hoon Lim, 2008. "A Risk-Based Debt Sustainability Framework," IMF Working Papers 08/40, International Monetary Fund.
    17. Yingbin Xiao & Dale F. Gray & Cheng Hoon Lim & Michael T. Gapen, 2004. "The Contingent Claims Approach to Corporate Vulnerability Analysis," IMF Working Papers 04/121, International Monetary Fund.
    18. Christian Keller & Peter Kunzel & Marcos Souto, 2007. "Measuring Sovereign Risk in Turkey," IMF Working Papers 07/233, International Monetary Fund.
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    Cited by:
    1. Saldías, Martín, 2013. "Systemic risk analysis using forward-looking Distance-to-Default series," Journal of Financial Stability, Elsevier, vol. 9(4), pages 498-517.
    2. Luisa Carpinelli, 2009. "Real effects of banking crises: a survey of the literature," Questioni di Economia e Finanza (Occasional Papers) 55, Bank of Italy, Economic Research and International Relations Area.
    3. Adam Gersl & Petr Jakubik, 2010. "Procyclicality of the Financial System and Simulation of the Feedback Effect," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2009/2010, chapter 0, pages 110-119 Czech National Bank, Research Department.
    4. Fabio C. Bagliano & Claudio Morana, 2011. "Macro-finance interactions in the US: A global perspective," Working papers 23, Former Department of Economics and Public Finance "G. Prato", University of Torino.

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