Another result of this study is that higher capitalization and lower leverage make banks' equity returns more resilient to adverse economic and sovereign risk shocks. The measure of bank capital matters: the equity to asset ratio has a positive effect on equity returns but the more commonly used Tier-1 capital to risk-weighted assets has an insignificant effect, partly owing to the fact that risk-weighted assets may fail to reflect risks adequately. This finding suggests that while official efforts to increase bank capital are well directed and should be commended, careful thought should be exercised on the choice of the right bank capitalization metric. We also find that the equity returns of banks less reliant on wholesale funding, as approximated by the loan to deposit ratio, tend to outperform after controlling for other variables. Higher reliance on wholesale funding, which is generally short-term, makes banks more vulnerable to funding shortages during periods of extreme market uncertainty. In contrast, deposits tend to be a more stable funding source. Nicht-technische Zusammenfassung AbstractThis study finds that equity returns in the banking sector in the wake of the Great Recession and the European sovereign debt crisis have been driven mainly by weak growth prospects and heightened sovereign risk and to a lesser extent, by deteriorating funding conditions and investor sentiment. While the equity return performance in the banking sector has been dismal in general, better capitalized and less leveraged banks have outperformed their peers, a finding that supports policymakers' efforts to strengthen bank capitalization.JEL Classification: G01, G14, G21

This paper explores the impact of political and institutional variables on public investment. Working with a sample of 80 presidential and parliamentary democracies between 1975 and 2012, we find that the rate of growth of public investment is higher at the beginning of electoral cycles and decelerates thereafter. The peak in public investment growth occurs between 21 and 25 months before elections. Cabinet ideology and government fragmentation influence the size of investment booms. More parties in government are associated with smaller increases in public investment while left-wing cabinets are associated with higher sustained increases in investment. Stronger institutions help attenuate the impact of elections on investment, but available information is insufficient to draw definitive conclusions.

This paper outlines an operational approach for incorporating the impact of asset price cycles in the calculation of structural fiscal balances (SFBs). The global financial crisis demonstrated that movements in asset prices can have an important fiscal impact. Failing to account for the fiscal impact of asset price cycles can encourage a pro-cyclical policy stance if temporarily high revenues are passed through into expenditures. In addition, over-estimating the SFB may lead to inadequate fiscal buffers when cyclical revenues eventually dissipate. The paper proposes an empirical approach to correct for asset prices and provides illustrative country results for selected OECD countries. We find that asset price cycles are imperfectly synchronized with the business cycle and are quantitatively significant with an average pre-crisis fiscal impact ranging from about ½ to 2 percent of GDP in the sample. For a number of countries, the pre-crisis fiscal impact of high asset prices was larger at about 4 percent of GDP.

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