The Shifts and the Shocks: Bank Risk, Leverage, and the Macroeconomy

38 Pages Posted: 18 Oct 2021 Last revised: 25 Jun 2022

See all articles by Dmitry Kuvshinov

Dmitry Kuvshinov

Universitat Pompeu Fabra

Björn Richter

Universitat Pompeu Fabra; Barcelona Graduate School of Economics (Barcelona GSE)

Kaspar Zimmermann

Leibniz Institute for Financial Research SAFE

Date Written: June 25, 2022

Abstract

This paper studies long-run trends in bank risk and their macroeconomic implications. We show that across advanced economies, bank asset risk declined materially between 1870 and 2016. But this trend was accompanied by large increases in leverage, which meant that bank equity risk increased. Moreover, losses on bank assets have become to be associated with increasingly large output gaps. Before 1945, bank asset returns had no excess predictive power for real activity, while afterwards, they have outperformed non-financial returns as a predictor of GDP. We show that this higher predictive power is linked to the secular increases in bank leverage.

Keywords: bank risk, leverage, financial shocks, macro-financial linkages, long-run trends

JEL Classification: G01, G15, G21, E44, N20, O16

Suggested Citation

Kuvshinov, Dmitry and Richter, Björn and Zimmermann, Kaspar, The Shifts and the Shocks: Bank Risk, Leverage, and the Macroeconomy (June 25, 2022). Available at SSRN: https://ssrn.com/abstract= or http://dx.doi.org/10.2139/ssrn.3942472

Dmitry Kuvshinov (Contact Author)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

Björn Richter

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Kaspar Zimmermann

Leibniz Institute for Financial Research SAFE ( email )

Frankfurt am Main
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
77
Abstract Views
283
rank
620,041
PlumX Metrics