Assessing the Potential Strength of a Bank Capital Channel in Europe: A Principal Component Analysis

The asymmetric impact of the recent financial crisis on the European countries' real activity raised the question of the heterogeneity of the transmission channels of shocks in the euro area. In this article, we suggest an assessment of this heterogeneity based on the banks' capital channel (BCC). To this end, we follow an original and global perspective, studying the combination of several key indicators through a Principal Component Analysis (PCA). Based on data collected before the beginning of the crisis, the analysis identifies Germany and Italy as the European economies a priori the most exposed to a financial shock passing through the BCC, while Finland, France or Spain would be the least exposed. The comparison of these a priori results to the post-crisis economic performance of the largest European countries supports the idea of a heterogeneous bank capital channel inside the union.