The Aggregate Behavior of Banks: A Proposal for Prudential Supervision

This study seeks to investigate a macroeconomic approach that could help bank regulators and supervisors perform their task of ensuring financial stability. To achieve this, an attempt is made to explain the behavior of banks by analyzing aggregate time series of credit lending and deposit-taking, which are the variables involved in financial intermediation. This article's main contribution is to present evidence of banks’ behavior in their role as financial intermediaries, in terms of the performance of the variables that represent their credit-granting or deposit-taking decisions. For this purpose the study used a vector autoregressive model to construct impulse response functions and the Granger test. The results demonstrate the existence of bilateral causality between credit lending and deposit--taking, suggesting that banks actively manage the financial intermediation process. In addition, the results show that shocks to deposits destabilize the credit lending process, and credit supply shocks, in turn, destabilize deposit-taking. The latter result is important for understanding how financial instability can arise, and is thus relevant for the bank regulator.