Jump to ContentJump to Main Navigation
Show Summary Details
In This Section

Jahrbücher für Nationalökonomie und Statistik

Journal of Economics and Statistics

Editor-in-Chief: Winker, Peter

Ed. by Franz, Wolfgang / Riphahn, Regina / Smolny, Werner / Wagner, Joachim

6 Issues per year

IMPACT FACTOR 2016: 0.156
5-year IMPACT FACTOR: 0.335

CiteScore 2016: 0.33

SCImago Journal Rank (SJR) 2015: 0.151
Source Normalized Impact per Paper (SNIP) 2015: 0.400

See all formats and pricing
In This Section
Volume 236, Issue 6 (Dec 2016)


Banking Overleveraging and Macro Instability: A Model and VSTAR Estimations

Frauke Schleer
  • Centre for European Economic Research (ZEW), Germany
/ Willi Semmler
  • Corresponding author
  • Henry Arnhold Professor of Economics, New School for Social Research, 79 Fifth Ave., New York, NY 10003, USA, ZEW Research Associate, and Currently Visitor at the European Central Bank, Frankfurt am Main, Germany
  • Email:
Published Online: 2016-12-23 | DOI: https://doi.org/10.1515/jbnst-2015-1042


Overleveraging of the banking sector has been considered one of the main causes of the 2007–09 financial crisis and the subsequent great recession. It was also of major concern for the subsequent BIS regulatory policies resulting in Basel III and its request for higher capital requirements. It has now become highly relevant for the planned European banking union. Overleveraging of the banking sector exposes the financial sector and the macroeconomy to vulnerabilities, but also, as critics state, seems to constrain credit flows to the private sector. We present here a measure of overleveraging, defined as the difference between actual and sustainable debt, conduct an empirical study on overleveraging for 40 banks in Europe, and study the vulnerabilities and credit contractions that can arise subsequently. Before the year 2004 overleveraging had not been a serious problem as leverage was on a sustainable level. However, in the run-up to the financial crisis, actual and optimal debt spread apart and the banking sector began to suffer from overleveraging. We use a non-linear Vector STAR model to evaluate the hypothesis that periods of increasing debt levels are accompanied by more severe credit constraints than periods of low leveraging. We demonstrate this for country groups across Europe.

Keywords: overleveraging; banking sector; vector STAR; real economy; credit flows; regime switch

JEL Classification: C61; E32; G01


  • Admati, A., M. Hellwig (2013), The Banker’s New Clothes: What’s Wrong With Banking and What to Do About It. Princeton, Princeton University Press.

  • Alessandro, C., S. João (2006), Output and Inflation Responses to Credit Shocks: Are There hreshold Effects in the Euro Area? Studies in Nonlinear Dynamics & Econometrics 10(2): 1–21.

  • Alessi, L., C. Detken (2014), Identifying Excessive Credit Growth and Leverage, Technical report, European Central Bank, Working Paper Series, No. 1723, August 2014.

  • Avdjiev, Stefan, Zheng Zeng, (2014), Credit Growth, Monetary Policy and Economic Activity in a Three-Regime TVAR Model. Applied Economics 46 (24): 2936–2951.

  • Balke, N.S. (2000), Credit and Economic Activity: Credit Regimes and Nonlinear Propagation of Shocks. The Review of Economics and Statistics 82 (2): 344–349.

  • Basel Committee On Banking Supervision (August 2010), An Assessment of the Long-term Economic Impact of Stronger Capital and Liquidity Requirements, Technical Report, Bank for International Settlements.

  • Bassett, W.F., M.B. Chosak, J.C. Driscoll, E. Zakrajsek (2014), Changes in Bank Lending Standards and the Macroeconomy. Journal of Monetary Economics 62 (C): 23–40.

  • Bernanke, B.S., M. Gertler, S. Gilchrist (1999), The Financial Accelerator in a Quantitative Business Cycle Framework. pp. 1341–1393 in: J.B. Taylor, M. Woodford (Eds.), Handbook of Macroeconomics, Vol. 1 of Handbook of Macroeconomics. Elsevier, Chapter 21,.

  • Bijsterbosch, M., M. Falagiarda (2014), Credit Supply Dynamics and Economic Activity in Euro Area Countries: A Time-Varying Parameter VAR Analysis, Technical Report, ECB Working Paper No. 1714.

  • Brunnermeier, M.K. (2009), Deciphering the Liquidity and Credit Crunch 2007–2008. Journal of Economic Perspectives 23 (1): 77–100.

  • Brunnermeier, M.K., M. Oehmke (2013), Bubbles, Financial Crises, and Systemic Risk. pp. 1221–1288 in: G.M. Constantinides, M. Harris, R.M. Stulz (Eds.), Handbook of the Economics of Finance, Vol. 2, Part B, Elsevier, Amsterdam, Chapter 18.

  • Brunnermeier, M.K., Y. Sannikov (2014), A Macroeconomic Model with a Financial Sector. American Economic Review 104 (2): 379–421.

  • Christiano, L., D. Ikeda (2014), Leverage Restrictions in a Business Cycle Model. pp. 215–216 in: S. Bauducco, L. Christiano, C. Raddatz (Eds.), Macroeconomic and Financial Stability: challenges for Monetary Policy, Vol. 19 of Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, Chapter 7.

  • de Bondt, G., A. Maddaloni, J.-L. Peydró, S. Scopel (2010), The Euro Area Bank Lending Survey Matters: Empirical Evidence for Credit and Output Growth, Working Paper Series 1160, European Central Bank.

  • Gerali, A., S. Neri, L. Sessa, F.M. Signoretti (2010), Credit and Banking in a DSGE Model of the Euro Area. Journal of Money, Credit and Banking 42 (s1): 107–141.

  • Gilchrist, S., B. Mojon (2014), Credit Risk in the Euro Area, Working Paper 20041, National Bureau of Economic Research.

  • Gilchrist, S., V. Yankov, E. Zakrajsek (2009), Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets. Journal of Monetary Economics 56 (4): 471–493.

  • Gilchrist, S., E. Zakrajšek (2012), Credit Spreads and Business Cycle Fluctuations. American Economic Review 102 (4): 1692–1720.

  • Grauwe, P. D., C. Macchiarelli (2015), Animal Spirits and Credit Cycles. Journal of Economic Dynamics and Control 59: 95–117.

  • Grüne, L., J. Pannek (2011), Nonlinear Model Predictive Control, Heidelberg, Springer.

  • Grüne, L., W. Semmler, M. Stieler (2013), Using Nonlinear Model Predictive Control for Dynamic Decision Problems in Economics, Technical Report, SSRN eLibrary.

  • Helbling, T., R. Huidrom, M.A. Kose, C. Otrok (2011), Do Credit Shocks Matter? A Global Perspective. European Economic Review 55 (3): 340–353. Special Issue: Advances in International Macroeconomics: Lessons from the Crisis.

  • Hristov, N., O. Hülsewig, T. Wollmershäuser (2012), Loan Supply Shocks During the Financial Crisis: Evidence for the Euro Area. Journal of International Money and Finance 31 (3): 569–592.

  • Hülsewig, O., P. Winker, A. Worms (2004), Bank Lending in the Transmission of Monetary Policy: A VECM Analysis for Germany. Journal of Economics and Statistics 224 (5): 511–529.

  • Koop, G., M.H. Pesaran, S.M. Potter (1996), Impulse Response Analysis in Nonlinear Multivariate Models. Journal of Econometrics 74 (1): 119–147.

  • Mittnik, S., W. Semmler (2013), The Real Consequences of Financial Stress. Journal of Economic Dynamics & Control 37 (8): 1479–1499.

  • Schleer, F. (2015), Finding Starting-Values for the Estimation of Vector STAR Models. Econometrics 3 (1): 65–90.

  • Schleer, F., W. Semmler (2015), Financial Sector and Output Dynamics in the Euro Area: Non-linearities Reconsidered. Journal of Macroeconomics 46: 235–263.

  • Serwa, D. (2012), Banking Crises and Nonlinear Linkages between Credit and Output. Applied Economics 44 (8): 1025–1040.

  • Stein, J.L. (2003), Stochastic Optimal Control Modeling of Debt Crises, CESifo Working Paper Series 1043, CESifo Group Munich.

  • Stein, J.L. (2012), Stochastic Optimal Control and the U.S. Financial Debt Crisis,Heidelberg/New York, Springer.

  • Teräsvirta, T., Y. Yang (2014a), Linearity and Misspecification Tests for Vector Smooth Transition Regression Models, Research Paper 2014-4, CREATES, Aarhus University.

  • Teräsvirta, T., Y. Yang (2014b), Specification, Estimation and Evaluation of Vector Smooth Transition Autoregressive Models with Applications, Research Paper 2014–8, CREATES, Aarhus University.

About the article

Received: 2016-01-11

Revised: 2016-09-10

Accepted: 2016-11-02

Published Online: 2016-12-23

Published in Print: 2016-12-01

Citation Information: Jahrbücher für Nationalökonomie und Statistik, ISSN (Online) 2366-049X, ISSN (Print) 0021-4027, DOI: https://doi.org/10.1515/jbnst-2015-1042. Export Citation

Comments (0)

Please log in or register to comment.
Log in