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

49 Pages Posted: 28 Jun 2022

See all articles by Dmitry Kuvshinov

Dmitry Kuvshinov

Universitat Pompeu Fabra

Kaspar Zimmermann

Leibniz Institute for Financial Research SAFE

Björn Richter

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

Date Written: June 1, 2022

Abstract

This paper studies the long-run evolution of bank risk and its links to the macroeconomy. Using data for 17 advanced economies, we show that the riskiness of bank assets declined materially between 1870 and 2016. But even though bank assets have become safer, the losses on these assets are associated with increasingly large output gaps. Before 1945, bank asset returns had no excess predictive power for future economic activity, while after 1945 they have outperformed non-financials as a predictor of GDP. We provide evidence linking this increasing connectedness between banks and the macroeconomy to secular increases in financial and macroeconomic leverage.

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

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

Suggested Citation

Kuvshinov, Dmitry and Zimmermann, Kaspar and Richter, Björn, The Shifts and the Shocks: Bank Risk, Leverage, and the Macroeconomy (June 1, 2022). ECB Working Paper No. 2022/2672, Available at SSRN: https://ssrn.com/abstract=4148110 or http://dx.doi.org/10.2139/ssrn.4148110

Dmitry Kuvshinov (Contact Author)

Universitat Pompeu Fabra ( email )

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

Kaspar Zimmermann

Leibniz Institute for Financial Research SAFE ( email )

Frankfurt am Main
Germany

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

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