Bank Capital and Real GDP Growth

50 Pages Posted: 8 Dec 2020

See all articles by Nina Boyarchenko

Nina Boyarchenko

Federal Reserve Bank of New York

Domenico Giannone

Centre for Economic Policy Research (CEPR); Amazon.com

Anna Kovner

Federal Reserve Bank of New York

Date Written: November 2020

Abstract

We study the relationship between bank capital ratios and the distribution of future real GDP growth. Growth in the aggregate bank capital ratio corresponds to a smaller left tail of GDP—smaller crisis probability—but at the cost of a smaller right tail of growth outcomes—smaller probability of exuberant growth. This trade-off persists at horizons of up to eight quarters, highlighting the long-range consequences of changes in bank capital. We show that the predictive information in bank capital ratio growth is over and above that contained in real credit growth, suggesting importance for bank capital beyond supplying credit to the nonfinancial sector. Our results suggest that coordination between macroprudential and monetary policy is crucial for supporting stable growth.

Keywords: capital ratios, growth-at-risk, quantile regressions, threshold regressions

JEL Classification: E32, G21, C22

Suggested Citation

Boyarchenko, Nina and Giannone, Domenico and Kovner, Anna, Bank Capital and Real GDP Growth (November 2020). FRB of New York Staff Report No. 950, Available at SSRN: https://ssrn.com/abstract=3742961 or http://dx.doi.org/10.2139/ssrn.3742961

Nina Boyarchenko (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-7339 (Phone)
212-720-1582 (Fax)

Domenico Giannone

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Amazon.com ( email )

Seattle, WA 98144
United States

Anna Kovner

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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