Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297352 
Year of Publication: 
2024
Series/Report no.: 
ECB Working Paper No. 2912
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
When capital in the banking system becomes depleted, the degree to which financial intermediation and the macroeconomy are adversely affected is likely to depend on the financial and macroeconomic environment. However, existing studies either assume that the effects of bank capital shocks are linear or ignore feedback effects and the impact on the macroeconomy. Using data on the largest euro area countries and Bayesian Panel Threshold VARs, we investigate the importance of different factors in amplifying shocks in banks' vulnerability to capital depletion. Our results demonstrate that nonlinearities matter. When the banking sector is already vulnerable to large capital losses, it is more difficult for banks to accommodate a depletion in capital and lending and economic activity contract more severely. Similarly, low interest rates, which are typically associated with low bank margins and profitability, also lead to a larger decline in lending. De-risking is also more pronounced in these cases. The state of the business cycle, though, does not influence the propagation of shocks to the same extent. We conclude that financial factors play a larger role than the macroeconomic environment in heightening shocks to banks' vulnerability to capital depletion.
Subjects: 
Bank Capital Vulnerability
Long Run Marginal Expected Shortfall
Bank Balance Sheet
Macroeconomic Adjustment
Panel Threshold VAR
Hierarchical Prior
JEL: 
C11
C33
E58
G21
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-6392-3
Document Type: 
Working Paper

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