The Impact of Bank Capital on Economic Activity - Evidence from a Mixed-Cross-Section GVAR Model

54 Pages Posted: 27 Apr 2016

See all articles by Marco Gross

Marco Gross

International Monetary Fund (IMF); European Central Bank (ECB)

Christoffer Kok

European Central Bank (ECB)

Dawid Żochowski

European Central Bank

Date Written: April 25, 2016

Abstract

We develop a Mixed-Cross-Section Global Vector Autoregressive (MCS-GVAR) model for the 28 EU economies and a sample of individual banking groups to study the propagation of bank capital shocks to the economy. We conduct various simulations with the model to assess how capital ratio shocks influence bank credit supply and aggregate demand. We distinguish between contractionar and expansionary deleveraging scenarios and confirm the intuitive result that only when banks choose to achieve higher capital ratios by shrinking their balance sheets would economic activity be at risk to contract. The model can be used to establish ranges of impact estimates for capital-related macroprudential policy measures, including counter-cyclical capital buffers, systemic risk buffers, G-SIB buffers, etc., also with a view to assessing the cross-country spillover effects of such policy measures. We highlight the importance for macroprudential policy makers to give clear guidance to banks as to how certain macroprudential policy measures should be implemented | depending on what measure is considered, during which phase in the business cycle, and for what particular purpose.

Keywords: Macro-

JEL Classification: C33, E51, E58

Suggested Citation

Gross, Marco and Kok, Christoffer and Żochowski, Dawid, The Impact of Bank Capital on Economic Activity - Evidence from a Mixed-Cross-Section GVAR Model (April 25, 2016). ECB Working Paper No. 1888. Available at SSRN: https://ssrn.com/abstract=2769909

Marco Gross (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Christoffer Kok

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Dawid Żochowski

European Central Bank ( email )

Sonnemannstrasse 20
Frankfurt am Main, 60314
Germany

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