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Fiscal consolidations and bank balance sheets

  • Cimadomo, Jacopo
  • Hauptmeier, Sebastian
  • Zimmermann, Tom

We empirically investigate the effects of fiscal policy on bank balance sheets, focusing on episodes of fiscal consolidation. To this aim, we employ a very large data set of individual banks' balance sheets, combined with a newly compiled data set on fiscal consolidations. We find that standard capital adequacy ratios such as the Tier-1 ratio tend to improve following episodes of fiscal consolidation. Our results suggest that this improvement results from a portfolio re-balancing from private to public debt securities which reduces the risk-weighted value of assets. In fact, if fiscal adjustment efforts are perceived as structural policy changes that improve the sustainability of public finances and, therefore, reduces credit risk, the banks' demand for government securities should increases relative to other assets. JEL Classification: E62, G11 G21, H30

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Paper provided by European Central Bank in its series Working Paper Series with number 1511.

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Date of creation: Feb 2013
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Handle: RePEc:ecb:ecbwps:20131511
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  1. Elijah Brewer III & George Kaufman & Larry Wall, 2008. "Bank Capital Ratios Across Countries: Why Do They Vary?," Journal of Financial Services Research, Springer, vol. 34(2), pages 177-201, December.
  2. Luca Agnello & Jacopo Cimadomo, 2012. "Discretionary Fiscal Policies over the Cycle: New Evidence Based on the ESCB Disaggregated Approach," International Journal of Central Banking, International Journal of Central Banking, vol. 8(2), pages 43-85, June.
  3. Darracq Pariès, Matthieu & Kok, Christoffer & Rodriguez-Palenzuela, Diego, 2010. "Macroeconomic propagation under different regulatory regimes: Evidence from an estimated DSGE model for the euro area," Working Paper Series 1251, European Central Bank.
  4. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2012. "The Aggregate Demand for Treasury Debt," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 233 - 267.
  5. Winnie P. H. Poon & Michael Firth, 2005. "Are Unsolicited Credit Ratings Lower? International Evidence From Bank Ratings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(9-10), pages 1741-1771.
  6. Christina D. Romer & David H. Romer, 2007. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," NBER Working Papers 13264, National Bureau of Economic Research, Inc.
  7. Arturo Estrella & Sangkyun Park & Stavros Peristiani, 2000. "Capital ratios as predictors of bank failure," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 33-52.
  8. Reint Gropp & Florian Heider, 2010. "The Determinants of Bank Capital Structure," Review of Finance, European Finance Association, vol. 14(4), pages 587-622.
  9. Daniel Leigh & Andrea Pescatori & Jaime Guajardo, 2011. "Expansionary Austerity New International Evidence," IMF Working Papers 11/158, International Monetary Fund.
  10. Andrea Pescatori & Daniel Leigh & Jaime Guajardo & Pete Devries, 2011. "A New Action-Based Dataset of Fiscal Consolidation," IMF Working Papers 11/128, International Monetary Fund.
  11. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
  12. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  13. Wagster, John D, 1996. " Impact of the 1988 Basle Accord on International Banks," Journal of Finance, American Finance Association, vol. 51(4), pages 1321-46, September.
  14. Ignazio Angeloni & Ester Faia & Roland Winkler, 2011. "Debt Consolidation and Financial Stability," Revue économique, Presses de Sciences-Po, vol. 62(6), pages 1067-1079.
  15. Mathias Drehmann & Claudio Borio & Kostas Tsatsaronis, 2011. "Anchoring Countercyclical Capital Buffers: The role of Credit Aggregates," International Journal of Central Banking, International Journal of Central Banking, vol. 7(4), pages 189-240, December.
  16. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
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