Fiscal Consolidations and Bank Balance Sheets

27 Pages Posted: 12 Feb 2013

See all articles by Jacopo Cimadomo

Jacopo Cimadomo

European Central Bank; Centre d'Etudes Prospectives et d'Info. Internationales (CEPII)

Sebastian Hauptmeier

European Central Bank (ECB) - Directorate General Economics

Tom Zimmermann

QuantCo, Inc.; University of Cologne

Date Written: February 2013

Abstract

We empirically investigate the effects of fiscal policy on bank balance sheets, focusing on episodes of fiscal consolidation. To this aim, we employ a very large data set of individual banks' balance sheets, combined with a newly compiled data set on fiscal consolidations. We find that standard capital adequacy ratios such as the Tier-1 ratio tend to improve following episodes of fiscal consolidation. Our results suggest that this improvement results from a portfolio re-balancing from private to public debt securities which reduces the risk-weighted value of assets. In fact, if fiscal adjustment efforts are perceived as structural policy changes that improve the sustainability of public finances and, therefore, reduces credit risk, the banks' demand for government securities should increases relative to other assets.

Keywords: fiscal consolidations, bank balance sheets, portfolio re-balancing, banking stability

JEL Classification: E62, G11 G21, H30

Suggested Citation

Cimadomo, Jacopo and Hauptmeier, Sebastian and Zimmermann, Tom, Fiscal Consolidations and Bank Balance Sheets (February 2013). ECB Working Paper No. 1511. Available at SSRN: https://ssrn.com/abstract=2209705

Jacopo Cimadomo (Contact Author)

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII) ( email )

9 rue Georges Pitard
Paris Cedex 15, F-75015
France

Sebastian Hauptmeier

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Tom Zimmermann

QuantCo, Inc. ( email )

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

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