Destabilizing effects of bank overleveraging on real activity - an analysis based on a threshold MCS-GVAR
Jerome Henry () and
Willi Semmler ()
No 2081, Working Paper Series from European Central Bank
We investigate the consequences of overleveraging and the potential for destabilizing effects from ﬁnancial- and real-sector interactions. In a theoretical framework, we model overleveraging and indicate how a highly leveraged banking system can lead to unstable dynamics and downward spirals. Inspired by Brunnermeier and Sannikov (2014) and Stein (2012), we empirically measure the deviation-from-optimal-leverage for 40 large EU banks. We then use this measure to condition the joint dynamics of credit ﬂows and macroeconomic activity in a large-scale regime change model: A Threshold Mixed-Cross-Section Global Vector Autoregressive (T-MCS-GVAR) model. The regime-switching component of the model aims to make the relationship between credit and real activity dependent on the extent to which the banking system is overleveraged. We ﬁnd signiﬁcant nonlinearities as a function of overleverage. When leverage is standing above its equilibrium level, the eﬀect of a deleveraging shocks on credit supply and economic activity are visibly more detrimental than at times of underleveraging. JEL Classification: E2, E6, C13, G6
Keywords: credit supply; macro-financial linkages; overleveraging (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20172081
Access Statistics for this paper
More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().