The Shifts and the Shocks: Bank Risk, Leverage, and the Macroeconomy
49 Pages Posted: 28 Jun 2022
Date Written: June 1, 2022
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: Suggested Citation