Bank Capital Constraints, Lending Supply and Economic Activity

56 Pages Posted: 31 Jul 2019

Date Written: November 6, 2018

Abstract

We estimate a Bayesian VAR with a detailed characterization of the banking sector for Italy since the 1990s. We use conditional forecasting techniques to retrieve bank capital shocks related to regulatory and supervisory initiatives and quantify their impact on credit supply and economic activity. We study three episodes characterized by increased regulatory/supervisory pressure and large increases in the Tier 1 capital ratio (the discussion on the Basel III reform; the 2011 EBA stress test and capital exercise; and the ECB’s comprehensive assessment and the launch of the SSM). We find evidence of large and persistent shocks to bank capital in all three episodes, which had significant negative effects on loan supply and GDP. Our results are robust to taking account of possible instabilities in the estimated relationships. The analysis focuses on the potential short-run costs of the regulatory/supervisory initiatives and disregards the potentially much larger long-run benefits of high bank capitalization.

Keywords: bank capital shocks, Bayesian VAR models, conditional forecasts, time variation

JEL Classification: C32, E32, F34

Suggested Citation

Conti, Antonio Maria and Nobili, Andrea and Signoretti, Federico Maria, Bank Capital Constraints, Lending Supply and Economic Activity (November 6, 2018). Bank of Italy Temi di Discussione (Working Paper) No. 1199, Available at SSRN: https://ssrn.com/abstract=3429150 or http://dx.doi.org/10.2139/ssrn.3429150

Antonio Maria Conti (Contact Author)

Banca d'Italia ( email )

Via Nazionale 91
Roma, 00161
Italy

Andrea Nobili

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Federico Maria Signoretti

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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