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Estimating the impact of shocks to bank capital in the euro area

Author

Listed:
  • Kanngiesser, Derrick
  • Martin, Reiner
  • Maurin, Laurent
  • Moccero, Diego

Abstract

We contribute to the empirical literature on the impact of shocks to bank capital in the euro area by estimating a Bayesian VAR model identied with sign restrictions. The variables included in the VAR are those typically used in monetary policy analysis, extended to include aggregate banking sector variables. We estimate two shocks affecting the euro area economy, namely a demand shock and a shock to bank capital. The main findings of the paper are as follows: i) Impulse-response analysis shows that in response to a shock to bank capital, banks boost capital ratios by reducing their relative exposure to riskier assets and by adjusting lending to a larger extent than they increase the level of capital and reserves per se; ii) Historical shock decomposition analysis shows that bank capital shocks have contributed to increasing capital ratios since the crisis, impairing bank lending growth and contributing to widen bank lending spreads; and iii) counterfactual analysis shows that higher capital ratios pre-crisis would have helped dampening the euro area credit and business cycle. This suggests that going forward the use of capital-based macroprudential policy instruments may be helpful to avoid a repetition of the events seen since the start of the global financial crisis. JEL Classification: G21, C32, C11

Suggested Citation

  • Kanngiesser, Derrick & Martin, Reiner & Maurin, Laurent & Moccero, Diego, 2017. "Estimating the impact of shocks to bank capital in the euro area," Working Paper Series 2077, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20172077
    Note: 339083
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2077.en.pdf
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    References listed on IDEAS

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    1. repec:rfe:zbefri:v:35:y:2017:i:2:p:249-275 is not listed on IDEAS
    2. Robert-Paul Berben & Ide Kearney & Robert Vermeulen, 2018. "DELFI 2.0, DNB's Macroeconomic Policy Model of the Netherlands," DNB Occasional Studies 1605, Netherlands Central Bank, Research Department.
    3. repec:eee:ecmode:v:73:y:2018:i:c:p:15-29 is not listed on IDEAS
    4. Okahara, Naoto, 2018. "銀行の資本構成と自己資本比率規制
      [Banks' capital structures and capital regulations]
      ," MPRA Paper 89869, University Library of Munich, Germany.
    5. Garcia-Barragan, Fernando & Liu, Guangling, 2018. "Welfare analysis of bank capital requirements with endogenous default," Economic Modelling, Elsevier, vol. 73(C), pages 15-29.
    6. Bredl, Sebastian, 2018. "The role of non-performing loans for bank lending rates," Discussion Papers 52/2018, Deutsche Bundesbank.

    More about this item

    Keywords

    bank balance sheet adjustment; Bayesian VAR; capital ratio; euro area; macroprudential policy; sign restrictions;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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