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Bank Losses, Monetary Policy and Financial Stability—Evidence on the Interplay from Panel Data

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  • Lea Zicchino
  • Erlend Nier

Abstract

We assess the extent to which loan losses affect banks’ provision of credit to companies and households and examine how feedback from losses to a reduction in credit is affected by the monetary policy stance. Using a unique cross-country dataset of more than 600 banks from 32 countries, we find that losses lead to a reduction in credit and that this effect is more pronounced when either initial bank capitalization is thin or when monetary policy is tight. Moreover, in the face of credit losses, ample capital is more important in cushioning the effect of loan losses when monetary policy is tight. In other words, capital buffers and accommodating monetary policy act as substitutes in offsetting the adverse effect of losses on loan growth. While most of these effects are stronger in crisis times, we find them to operate both in and outside full-blown banking crises. These findings have important implications for the interplay between financial stability and monetary policy, which this paper also draws out.

Suggested Citation

  • Lea Zicchino & Erlend Nier, 2008. "Bank Losses, Monetary Policy and Financial Stability—Evidence on the Interplay from Panel Data," IMF Working Papers 08/232, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:08/232
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Erlend Nier, 2009. "Financial Stability Frameworks and the Role of Central Banks; Lessons From the Crisis," IMF Working Papers 09/70, International Monetary Fund.
    2. Nada Mora & Andrew Logan, 2012. "Shocks to bank capital: evidence from UK banks at home and away," Applied Economics, Taylor & Francis Journals, vol. 44(9), pages 1103-1119, March.
    3. Rudiger Ahrend & Antoine Goujard, 2012. "International Capital Mobility and Financial Fragility - Part 3. How Do Structural Policies Affect Financial Crisis Risk?: Evidence from Past Crises Across OECD and Emerging Economies," OECD Economics Department Working Papers 966, OECD Publishing.
    4. Osmar Jasan Bolívar Rosales, 2016. "Bolivianization And Effectiveness Of The Monetary Policy," Volúmenes de los Cuadernos de Investigacion Economica Boliviana publicados por el Ministerio de Economía y Finanzas Públicas 2016-2, Ministerio de Economía y Finanzas Publicas de Bolivia.
    5. Xavier Freixas, 2010. "Post-crisis challenges to bank regulation," Economic Policy, CEPR;CES;MSH, vol. 25, pages 375-399, April.
    6. Tabak, Benjamin Miranda, 2013. "Financial Stability and Monetary Policy - The case of Brazil," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 67(4), November.
    7. Jeon, Bang Nam & Wu, Ji, 2014. "Global banks and internal capital markets: Evidence from bank-level panel data in emerging economies," Journal of Multinational Financial Management, Elsevier, vol. 28(C), pages 79-94.
    8. Muhamed Zulkhibri, 2013. "Bank-characteristics, lending channel and monetary policy in emerging markets: bank-level evidence from Malaysia," Applied Financial Economics, Taylor & Francis Journals, vol. 23(5), pages 347-362, March.

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