How do shocks to bank capital affect lending and growth?

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Title: How do shocks to bank capital affect lending and growth?
Author: Tölö, Eero ; Miettinen, Paavo
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 25/2018
Year of publication: 2018
Publication date: 28.11.2018
Pages: 65
Subject (yso): pankit; luotonanto; luotot; kannattavuus; pääoma; häiriöt
Keywords: Eurooppa
JEL: C11; C32; C54
Other keywords: structural vector autoregression; macroprudential policy; bank capital; bank profitability; bank lending
Abstract: We examine bank capital shocks using a recent new approach based on non-normal errors in vector autoregressive models. Using a sample of 14 European economies over January 2004 through March 2018 we identify two distinct classes of bank capital shocks, capital tightening shocks, and bank profitability shocks. We find that both bank capital shocks frequently lead to changes in lending volume and interest rates for new loans. In contrast to some recent similar studies, we find less evidence for impact on production. Bank capital shocks have further effects on the substitution between the bank and market-based financing and on credit allocation across different borrower sectors. Policymakers may find these results useful when considering counter-cyclical adjustments to the bank capital requirements.

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