While the global financial crisis revealed a need for macroprudential policy tools to mitigate the build-up of risk in the financial system, the impact of such policies on the banking sector and the macroeconomy remains largely uncertain. We contribute to the empirical literature that estimates the impact of shocks to bank capital buffers on bank lending and the macroeconomy by estimating a Bayesian VAR model identified with sign restrictions. We use bank-level data for large euro area listed banks to construct an aggregate bank capital buffer for the euro area, which is included as another variable in the model. We estimate three shocks affecting the euro area economy, namely a demand shock, a monetary policy shock and a shock to bank capital buffers. We find that banks curtail lending and reduce their relative exposure to riskier assets in response to a shock to the bank capital buffer. Historical shock decomposition analysis shows that shocks to bank capital buffers have contributed to impair bank lending growth and to widen bank lending spreads, hence depressing economic activity.
Aiyar, S., C. W. Calomiris, and T. Wieladek. 2014. “Does Macro-Prudential Regulation Leak? Evidence from a U.K. policy experiment.” Journal of Money, Credit and Banking 46 (1): 181–2014.10.1111/jmcb.12086)| false
Bassett, W. F., M. B. Chosak, J. C. Driscoll, and E. Zakrajsek. 2014. “Changes in Bank Lending Standards and the Macroeconomy.” Journal of Monetary Economics 62: 23–40.10.1016/j.jmoneco.2013.12.005)| false
Basten, C., and C. Koch. 2015. “Higher Bank Capital Requirements and Mortgage Pricing: Evidence from the Countercyclical Capital Buffer (CCB).” BIS Working Papers, No 511, September.
Bernanke, B. S., and C. S. Lown. 1991. “The Credit Crunch.” Brookings Papers on Economic Activity, No. 2, Broookings Institution, 205–239.
Berrospide, J. M., and R. M. Edge. 2010. “The Effects of Bank Capital on Lending: What Do We Know, and What Does It Mean?” International Journal of Central Banking 6: 5–54. .
Bridges, J., D. Gregory, M. Nielsen, S. Pezzini, A. Radia, and M. Spaltro. 2014. “The Impact of Capital Requirements on Bank Lending.” Working Paper, No. 486, Bank of England.
Drehmann, M., C. Borio, and K. Tsatsaronis. 2011. “Anchoring Countercyclical Capital Buffers: The Role of Credit Aggregates.” International Journal of Central Banking 7 (4): 189–240.
ECB. 2015. “The Transmission of the ECB’s Recent Non-Standard Monetary Policy Measures.” Economic Bulletin, ECB (7).
Francis, W., and M. Osborne. 2009. “Bank Regulation, Capital and Credit Supply: Measuring the Impact of Prudential Standards.” Occasional Paper Series, No. 36, U.K. Financial Services Authority, London.
Gambetti, L., and A. Musso. 2017. “Loan Supply Shocks and the Business Cycle.” Journal of Applied Econometrics 32: 764–782.
Gropp, R., T. Mosk, S. Ongena, and C. Wix. 2016. “Bank Response to Higher Capital Requirements: Evidence from a Quasi-Natural Experiment.” Working Paper, No. 156, SAFE Working Paper Series, Goethe University Frankfurt.
Kok, C., M. Gross, and D. Zochowski. 2015. “The Impact of Bank Capital on Economic Activity - Evidence from a Mixed-Cross-Section GVAR model.” Working Paper Series 1888, European Central Bank.
Hancock, D., A. J. Laing, and J. A. Wilcox. 1995. “Bank Capital Shocks: Dynamic Effects on Securities, Loans, and Capital.” Journal of Banking & Finance 19: 661–677.
Hancock, D., A. J. Laing, and J. A. Wilcox. 1995. “Bank Capital Shocks: Dynamic Effects on Securities, Loans, and Capital.” Journal of Banking & Finance 19: 661–677.10.1016/0378-4266(94)00147-U)| false
Hristov, N., O. Hülsewig, and T. Wollmershäuser. 2012. “Loan Supply Shocks During the Financial Crisis: Evidence for the Euro Area.” Journal of International Money and Finance 31: 569–592.10.1016/j.jimonfin.2011.10.007)| false
Jiménez, G., S. Ongena, J.-L. Peydro, and J. Saurina. 2017. “Macroprudential Policy, Countercyclical Bank Capital Buffers, and Credit Supply: Evidence from the Spanish Dynamic Provisioning Experiments.” Journal of Political Economy 125: 2126–2177.
Jiménez, G., S. Ongena, J.-L. Peydro, and J. Saurina. 2017. “Macroprudential Policy, Countercyclical Bank Capital Buffers, and Credit Supply: Evidence from the Spanish Dynamic Provisioning Experiments.” Journal of Political Economy 125: 2126–2177.10.1086/694289)| false
Moccero, D., M. Darracq Paries, and L. Maurin. 2014. “Financial Conditions Index and Identification of Credit Supply Shocks for the Euro Area.” International Finance 17 (3): 297–321.10.1111/infi.12056)| false
Noss, J., and P. Toffano. 2016. “Estimating the Impact of Changes in Aggregate Bank Capital Requirements During an Upswing.” Journal of Banking and Finance 62: 15–27.10.1016/j.jbankfin.2015.09.020)| false
Peek, J., and E. S. Rosengren. 1997. “The International Transmission of Financial Shocks: The Case of Japan.” The American Economic Review 87 (4): 495–505.
Puri, M., J. Rocholl, and S. Steffen. 2011. “Global Retail Lending in the Aftermath of the U.S. Financial Crisis: Distinguishing between Supply and Demand Effects.” Journal of Financial Economics 100: 556–578.
Puri, M., J. Rocholl, and S. Steffen. 2011. “Global Retail Lending in the Aftermath of the U.S. Financial Crisis: Distinguishing between Supply and Demand Effects.” Journal of Financial Economics 100: 556–578.10.1016/j.jfineco.2010.12.001)| false
Rubio-Ramírez, J. F., D. F. Waggoner, and T. Zha. 2010. “Structural Vector Autoregressions: Theory of Identification and Algorithms for Inference.” Review of Economic Studies 77: 665–696.10.1111/j.1467-937X.2009.00578.x)| false