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Bank capital constraints, lending supply and economic activity

Antonio Conti (), Andrea Nobili () and Federico Signoretti ()

No 1199, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We estimate a Bayesian VAR with a detailed characterization of the banking sector for Italy since the 1990s. We use conditional forecasting techniques to retrieve bank capital shocks related to regulatory and supervisory initiatives and quantify their impact on credit supply and economic activity. We study three episodes characterized by increased regulatory/supervisory pressure and large increases in the Tier 1 capital ratio (the discussion on the Basel III reform; the 2011 EBA stress test and capital exercise; and the ECB’s comprehensive assessment and the launch of the SSM). We find evidence of large and persistent shocks to bank capital in all three episodes, which had significant negative effects on loan supply and GDP. Our results are robust to taking account of possible instabilities in the estimated relationships. The analysis focuses on the potential short-run costs of the regulatory/supervisory initiatives and disregards the potentially much larger long-run benefits of high bank capitalization.

Keywords: bank capital shocks; Bayesian VAR models; conditional forecasts; time variation (search for similar items in EconPapers)
JEL-codes: C32 E32 F34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-eec, nep-fdg, nep-mac and nep-mon
Date: 2018-11
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1199_18

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