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Capital and liquidity buffers and the resilience of the banking system in the euro area

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  • Budnik, Katarzyna
  • Bochmann, Paul

Abstract

How do capital and liquidity buffers affect the evolution of bank loans in periods of financial and economic distress? To answer this question we study the responses of 219 individual banks to aggregate demand, standard and unconventional monetary policy shocks in the euro area between 2007 and 2015. Banks’ responses are derived from a factor-augmented VAR, which relates macroeconomic aggregates to individual bank balance sheet items and interest rates. We find that banks with high capital and liquidity buffers show a more muted response in their lending to adverse real economy shocks. Capital and liquidity buffers also affect bank responses to monetary policy shocks. High bank capitalisation reduces the degree to which banks increase the average duration of loans to the non-financial corporate sector, while high bank liquidity strengthens the positive response to policy easing of both longand short-term loans to the non-financial corporate sector. The latter findings substantiate the relevance of interactions between prudential controls and monetary policy. JEL Classification: E51, E52, G21

Suggested Citation

  • Budnik, Katarzyna & Bochmann, Paul, 2017. "Capital and liquidity buffers and the resilience of the banking system in the euro area," Working Paper Series 2120, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20172120
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    References listed on IDEAS

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    More about this item

    Keywords

    capital requirements; liquidity requirements; macroprudential policy; monetary policy;

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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