Are Market Views on Banking Industry Useful for Forecasting Economic Growth?

Abstract

Using two market-view variables, namely the regulatory forbearance fraction imbedded in the bank capital and the market-valued of the bank equity-to-assets ratio, derived from market equity and total liabilities from listed commercial banks in the U.S. and three countries (Japan, China, India) and a region (Southeast Asia) in Asia, we show compelling evidence that market views on banking industry have significant predictive power on economic growth after controlling for stock, bond, and inflation variables. The current paper further contributes to the literature on interaction between the financial intermediation and the economic growth by showing evidence of market perceptions of the banking industry impacting the real economic activities.

Keywords: Bank regulation, Regulatory forbearance, Forecasting, Economic growth

JEL Classification: G17, G21, G28