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Bank Capital and Real GDP Growth

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Abstract

We study the relationship between bank capital ratios and the distribution of future real GDP growth. Growth in the aggregate bank capital ratio corresponds to a smaller left tail of GDP—smaller crisis probability—but at the cost of a smaller right tail of growth outcomes—smaller probability of exuberant growth. This trade-off persists at horizons of up to eight quarters, highlighting the long-range consequences of changes in bank capital. We show that the predictive information in bank capital ratio growth is over and above that contained in real credit growth, suggesting importance for bank capital beyond supplying credit to the nonfinancial sector. Our results suggest that coordination between macroprudential and monetary policy is crucial for supporting stable growth.

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  • Nina Boyarchenko & Domenico Giannone & Anna Kovner, 2020. "Bank Capital and Real GDP Growth," Staff Reports 950, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:89123
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    References listed on IDEAS

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    1. Eric Ghysels & Leonardo Iania & Jonas Striaukas, 2018. "Quantile-based Inflation Risk Models," Working Paper Research 349, National Bank of Belgium.
    2. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, Oxford University Press, vol. 124(4), pages 1449-1496.
    3. Mark Gertler & Nobuhiro Kiyotaki, 2015. "Banking, Liquidity, and Bank Runs in an Infinite Horizon Economy," American Economic Review, American Economic Association, vol. 105(7), pages 2011-2043, July.
    4. De Jonghe, Olivier & Dewachter, Hans & Ongena, Steven, 2020. "Bank capital (requirements) and credit supply: Evidence from pillar 2 decisions," Journal of Corporate Finance, Elsevier, vol. 60(C).
    5. John R. Walter, 2019. "US Bank Capital Regulation: History and Changes Since the Financial Crisis," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 1-40.
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    Cited by:

    1. Ruiz Ortega, Esther & Rodríguez Caballero, Carlos Vladimir & Gonzalez Rivera, Gloria, 2021. "Expecting the unexpected: economic growth under stress," DES - Working Papers. Statistics and Econometrics. WS 32148, Universidad Carlos III de Madrid. Departamento de Estadística.

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    More about this item

    Keywords

    capital ratios; growth-at-risk; quantile regressions; threshold regressions;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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