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How do shocks to bank capital affect lending and growth?

Eero Tölö and Paavo Miettinen

No 25/2018, Research Discussion Papers from Bank of Finland

Abstract: We examine bank capital shocks using a recent new approach based on non-normal errors in vector autoregressive models. Using a sample of 14 European economies over January 2004 through March 2018 we identify two distinct classes of bank capital shocks, capital tightening shocks, and bank profitability shocks. We find that both bank capital shocks frequently lead to changes in lending volume and interest rates for new loans. In contrast to some recent similar studies, we find less evidence for impact on production. Bank capital shocks have further effects on the substitution between the bank and market-based financing and on credit allocation across different borrower sectors. Policymakers may find these results useful when considering counter-cyclical adjustments to the bank capital requirements.

JEL-codes: C11 C32 C54 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-eec and nep-fdg
Date: 2018-11-28
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Persistent link: https://EconPapers.repec.org/RePEc:bof:bofrdp:2018_025

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