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Fiscal consolidations and bank balance sheets

Jacopo Cimadomo (), Sebastian Hauptmeier and Tom Zimmermann

Journal of International Money and Finance, 2014, vol. 45, issue C, 74-90

Abstract: We empirically investigate the effects of fiscal policy on bank balance sheets, focusing on episodes of fiscal consolidation. To this aim, we employ a very large data set of individual banks' balance sheets, combined with a newly compiled data set on fiscal consolidations. We find that standard capital adequacy ratios such as the Tier-1 ratio tend to improve following episodes of fiscal consolidation: for the median bank in our sample, a 1% of GDP fiscal consolidation increases the Tier-1 capital ratio by around 1.5 percentage points over two years. Our results suggest that this improvement results from a portfolio re-balancing from private to public debt securities which reduces the risk-weighted value of assets. In fact, if fiscal adjustment efforts are perceived as structural policy changes that improve the sustainability of public finances and, therefore, reduce credit risk, the banks' demand for government securities should increase relative to other assets.

Keywords: Fiscal consolidations; Bank balance sheets; Portfolio re-balancing; Banking stability (search for similar items in EconPapers)
JEL-codes: E62 G11 G21 H30 (search for similar items in EconPapers)
Date: 2014
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Working Paper: Fiscal consolidations and bank balance sheets (2013) Downloads
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DOI: 10.1016/j.jimonfin.2014.02.007

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Handle: RePEc:eee:jimfin:v:45:y:2014:i:c:p:74-90