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The macroeconomic impact of shocks to bank capital buffers in the Euro Area

Kanngiesser Derrick, Reiner Martin (), Maurin Laurent and Diego Moccero ()
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Kanngiesser Derrick: Bank of England, London, UK
Maurin Laurent: European Investment Bank, Luxembourg, Luxembourg

The B.E. Journal of Macroeconomics, 2020, vol. 20, issue 1, 17

Abstract: While the global financial crisis revealed a need for macroprudential policy tools to mitigate the build-up of risk in the financial system, the impact of such policies on the banking sector and the macroeconomy remains largely uncertain. We contribute to the empirical literature that estimates the impact of shocks to bank capital buffers on bank lending and the macroeconomy by estimating a Bayesian VAR model identified with sign restrictions. We use bank-level data for large euro area listed banks to construct an aggregate bank capital buffer for the euro area, which is included as another variable in the model. We estimate three shocks affecting the euro area economy, namely a demand shock, a monetary policy shock and a shock to bank capital buffers. We find that banks curtail lending and reduce their relative exposure to riskier assets in response to a shock to the bank capital buffer. Historical shock decomposition analysis shows that shocks to bank capital buffers have contributed to impair bank lending growth and to widen bank lending spreads, hence depressing economic activity.

Keywords: bank balance sheet adjustment; bank capital buffer; bayesian VAR; Euro area; sign restrictions (search for similar items in EconPapers)
JEL-codes: C11 E58 G21 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1515/bejm-2018-0009

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