Nikolov, Pavel (2010): Procyclical Effects of the banking System during the financial and economic Crisis 2007-2009: the Case of Europe.
Download (529kB) | Preview
This paper examines the relationship between adverse shocks to the banking system and their effect on the general economy in Europe. This topic was brought to the spotlight during the 2007-2009 financial and economic crisis, when the relatively healthy, at that time, European economy was severely hit by the spread of the US sub-prime mortgage problems. This interbanking contagion may have been one of the main, if not the primary, reasons why the region entered into a recession during the period. If significant evidence can be found to support this theory, it will make the need for more regulations on the financial system and stricter capital requirements even more apparent. The research includes comprehensive literature survey on past and recent financial crises, procyclical banking practices and their impact on the economy. Then it goes on to developing a theoretical model of the transmission of negative economic shocks from the financial system to the rest of the economy. The theoretical model is empirically tested on a range of banking specific and macroeconomic variables. The results show that a loss of confidence in the financial system and banking losses are followed by a significant decrease in the new loans to non-financial companies and subsequent economic contraction. Moreover, countries with better capitalized banks experienced smaller declines during the crisis and in general Tier 1 capital is correlated positively with economic growth.
|Item Type:||MPRA Paper|
|Original Title:||Procyclical Effects of the banking System during the financial and economic Crisis 2007-2009: the Case of Europe|
|Keywords:||economic shocks, financial crisis, banking system stability, procyclical effects|
|Subjects:||E - Macroeconomics and Monetary Economics > E0 - General
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
G - Financial Economics > G0 - General > G01 - Financial Crises
|Depositing User:||Pavel Nikolov|
|Date Deposited:||19. Jul 2010 10:27|
|Last Modified:||14. Feb 2013 01:25|
Abreu, D., Brunnermeier, M. (2003).“Bubbles and Crashes.” Econometrica 71: 173–204.
Adrian, T., Shin, H.S. (2008a). “Liquidity and leverage.” Journal of Financial Intermediation, In Press, Corrected Proof, Available online 24 December 2008.
Adrian, T., Shin, H.S. (2008b). “Financial Intermediary Leverage and Value-at-Risk.” Federal Bank of New York, Staff Report No.338 .
Adrian, T., Shin, H.S. (2009). “Money, Liquidity and Monetary Policy” American Economic Review: Papers & Proceedings 2009 99: 600–605.
Barth, T., Caprio, G., Levine, R. (2004). “Bank regulation and supervision: What works best?.” Journal of Financial Intermediation 13, 205-248.
Beck, T., Demirgüç-Kunt, A., Levine, R. (2000). “A new database on financial development and structure.” World Bank Economic Review 14: 597-605.
Beltratti, A., Stulz, R. (2009). “Why did some banks perform better during the credit crisis? A cross-country study of the impact of governance and regulation.” Fisher College of Business Working Paper No. 2009-03-012..
Berger, A., Bouwman, C. (2009). “Bank liquidity creation, monetary policy, and financial crises,” working paper.
Bernanke, B., Gertler, M., Gilchrist, S. (1998). “The Financial Accelerator in a Quantitative Business Cycle Framework.” NBER Working Paper No. W6455.
Bernanke, B., Gertler, M., Gilchrist, S. (1996). “The Financial Accelerator and the Flight to Quality.” Review of Economics and Statistics, 78: 1–15.
Borio, C., Furfine, C., Lowe, L. (2001). “Procyclicality of the financial system and financial stability: issues and policy options.” BIS Papers 1: 1-57.
Brunnermeier, M. (2009), “Deciphering the liquidity and credit crunch 2007-2008,” Journal of Economic Perspectives 23, 77-100.
Brunnermeier, M., Pedersen, L. (2008). “Market Liquidity and Funding Liquidity,” Review of Financial Studies 22: 2201-2238.
Caballero, R., Krishnamurthy, A. (2007). “Collective Risk Management in a Flight to Quality Episode.” NBER Working Paper No.W12896, forthcoming: Journal of Finance.
Demirgüc-Kunt, A., Huizinga, H. (2009). “Bank activity and funding strategies: The impact on risk and return.” CEPR Discussion Paper No. DP7170.
Demirgüc-Kunt, A., Laeven, L., Levine, R. (2004). “Regulations, market structure, institutions, and the cost of financial intermediation.” Journal of Money, Credit and Banking 36: 593-622.
Edwards, S., Vegh, C. (1997). “Banks and macroeconomic disturbances under predetermined exchange rates.” Journal of Monetary Economics 40: 239-278.
Fahlenbrach, R., Stulz, R. (2009). “Bank CEO incentives and the credit crisis.” Charles A Dice Center Working Paper No. 2009-13.
Foos, D., Norden, L., Weber, M. (2010). “Loan Growth and Riskiness of Banks.” Working paper.
Gatev, E., Strahan, P. (2006) “Banks’ advantage in hedging liquidity risk: Theory and evidence from the commercial paper market.” Journal of Finance 61: 867-892.
Hellwig, M. (2009). “Systemic Risk in the Financial Sector: An Analysis of the Subprime-Mortgage Financial Crisis.” De Economist 157: 129-207.
Hendel, I. (1996). “Competition Under Financial Distress.” The Journal of Industrial Economics 44: 309-324.
Holmström, B., Tirole, J. (1997). “Financial Intermediation, Loanable Funds, and the Real Sector.” Quarterly Journal of Economics 112: 663–691.
International Monetary Fund (2008), “Global Financial Stability Report: Financial Stress and Deleveraging” October 2008.
Jensen, M., Meckling, W. (1976), “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure”, Journal of Financial Economics 3: 305-360.
Kashyap, A., Rajan, R., Stein, J. (2002) “Banks as liquidity providers: An explanation for the coexistence of lending and deposit-taking.” Journal of Finance 57: 33-73.
Kashyap, A., Rajan, R., Stein, J. (2008) “Rethinking Capital Regulation.” Federal Reserve Bank of Kansas City, Symposium at Jackson Hole: 431-471.
Kashyap, A., Stein, J. (2000). “What do a million observations on banks say about the transmission of monetary policy?” American Economic Review 90: 407-428.
Kao, D., Shumaker, R. (1999). “Equity Style Timing”. Financial Analysts Journal 55: 37-48.
King, R., Levine, R. (1993). “Finance and Growth: Schumpeter might be Right.” The Quarterly Journal of Economics 108: 717-737. Kiyotaki, N., Moore, J. (1997). “Credit Cycles.” Journal of Political Economy 105: 211–48.
Laeven, L., Levine, R. (2009). “Bank governance, regulation, and risk taking.” Journal of Financial Economics 93: 259-275.
Laeven, L., Valencia, F. (2009). “Systemic banking crises: A new database.” IMF Working Paper No. 08/224.
Morrison, A., White, L. (2005). “Crises and Capital Requirements in Banking.” The American Economic Review 95: 1548-1572.
Mortgage Bankers Association, 2009, “Press Release - National Delinquency Survey”, in: http://www.mbaa.org/NewsandMedia/PressCenter/71112.htm .
Reinhart C., Rogoff K. (2008) “Is the 2007 US Sub-Prime Financial Crisis So Different? An International Historical Comparison.” American Economic Review 98: 339-344.
Reinhart C., Rogoff K. (2009). “The Aftermath of Financial Crises.” American Economic Review 99: 466-472.
Shin, H. (2009). “Reflections on Northern Rock: the bank run that heralded the global financial crisis.” Journal of Economic Perspectives 23: 101-119.
Taylor, J. (2009). “The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong.” NBER Working Paper No. w14631.
Taylor, J., Williams, J. (2008). “A black swan in the money market.” American Economic Journal: Macroeconomics 1: 58–83.
Williamson, S. (1988), Liquidity, Banking, and Bank Failures, in: International Economic Review 29, 25-43.