The Real Effects of Banking Shocks: Evidence from OECD Countries

Abstract

This paper estimates the impact of variations in bank profit, bank capital and bank liquidity on the real economy, using a panel of 30 OECD countries. The results indicate that shocks to bank profits have a significant impact on GDP growth which lasts approximately two years. The effect is stronger for activities and sectors that rely more heavily on external finance, and is more pronounced in countries with a large banking sector. Bank liquidity also exhibits some impact on real economic activity, though to a lesser extent than bank profit. Surprisingly, variations in bank capital are found to have no significant real effects.

Keywords: bank profit, bank capital, bank liquidity, business cycle, external finance, bank crisis

JEL Classification: C32, E32, E44, G21