Macroeconomic Factors and Micro-Level Bank Risk

50 Pages Posted: 8 Oct 2010

See all articles by Claudia M. Buch

Claudia M. Buch

Deutsche Bundesbank

Sandra Eickmeier

Deutsche Bundesbank; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Esteban Prieto

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: September 30, 2010

Abstract

The interplay between banks and the macroeconomy is of key importance for financial and economic stability. We analyze this link using a factor-augmented vector autoregressive model (FAVAR) which extends a standard VAR for the U.S. macroeconomy. The model includes GDP growth, inflation, the Federal Funds rate, house price inflation, and a set of factors summarizing conditions in the banking sector. We use data of more than 1,500 commercial banks from the U.S. call reports to address the following questions. How are macroeconomic shocks transmitted to bank risk and other banking variables? What are the sources of bank heterogeneity, and what explains differences in individual banks’ responses to macroeconomic shocks? Our paper has two main findings: (i) Average bank risk declines, and average bank lending increases following expansionary shocks. (ii) The heterogeneity of banks is characterized by idiosyncratic shocks and the asymmetric transmission of common shocks. Risk of about 1/3 of all banks rises in response to a monetary loosening. The lending response of small, illiquid, and domestic banks is relatively large, and risk of banks with a low degree of capitalization and a high exposure to real estate loans decreases relatively strongly after expansionary monetary policy shocks. Also, lending of larger banks increases less while risk of riskier and domestic banks reacts more in response to house price shocks.

Keywords: FAVAR, bank risk, macro-finance linkages, monetary policy, microeconomic adjustment

JEL Classification: E44, G21

Suggested Citation

Buch, Claudia M. and Eickmeier, Sandra and Prieto, Esteban, Macroeconomic Factors and Micro-Level Bank Risk (September 30, 2010). CESifo Working Paper Series No. 3194, Available at SSRN: https://ssrn.com/abstract=1688262 or http://dx.doi.org/10.2139/ssrn.1688262

Claudia M. Buch

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Sandra Eickmeier (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Strasse 14
Frankfurt/Main D-60431
Germany

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

Esteban Prieto

affiliation not provided to SSRN

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