The Benefits and Costs of Adjusting Bank Capitalisation: Evidence from Euro Area Countries

Abstract

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Measuring the Impact of a Bank Failure on the Real Economy. An EU-wide Analytical Framework

“…16 After considering all the trade-offs explained above, and in particular data and model availability, the proposed framework estimates the "credit-to-real economy multiplier" (Step 2) by following two distinct but complementary models. We use first a Factor-Augmented Vector Auto-Regressive model (FAVAR) model adapted from Budnik et al (2019) that, by plugging in several of two large Japanese banks to show that a sudden loan restriction affected small firms significantly stronger than large firms.…”

“…GDP, or value added) to a credit supply shock to firms. To retrieve the latter, we follow the approach by Budnik et al (2019), which explores the merits of a structural factor-augmented vector autoregression model for the assessment of macroprudential policies.…”

“…In the vein of Budnik et al's (2019) model, the vector of observable variables includes real value added or GDP growth rate and their deflators, lending margins, the spread between the EONIA and retail deposit rate (as a proxy for funding costs), and the bank-level total outstanding loans to NFCs. At bank-level, we consider the credit institutions under the SRB's remit of the four countries included in the sample (Austria, Germany, Spain and Italy).…”

“…In a first step, the potential credit shortfall affecting firms and households due to the sudden failure of one or several banks is quantified. In a second step, the impact of a firm's credit shortfall on real variables is estimated both via a Factor-Augmented Vector Autoregression (FAVAR) model inspired by Budnik et al (2019) and via a micro-econometric model inspired by Greenstone et al (2019). Once the economic impacts of a specific bank failure have been estimated, reference values (benchmarks) based on historical time series are provided to assess the importance of the estimated outcomes.…”

“…For example,Budnik et al (2019) use macroeconomic data in combination with bank-individual micro data to build their FAVAR model.…”