Fiscal consolidations and bank balance sheets |
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| Institution: | 1. European Central Bank, Fiscal Policies Division, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany;2. European Commission, Rue de la Loi 170, B-1040 Brussels, Belgium;3. Harvard University, Department of Economics, 1805 Cambridge Street, Cambridge, MA 02138, USA;2. IANS, Universität Stuttgart, Pfaffenwaldring 57, D-70569 Stuttgart, Germany;2. IANS, Universität Stuttgart, Pfaffenwaldring 57, D-70569 Stuttgart, Germany;1. Institute of Parallel and Distributed Systems, University of Stuttgart, Stuttgart, Germany;2. Institute of Applied Analysis and Numerical Simulation, University of Stuttgart, Stuttgart, Germany;1. Max-Planck-Institute for Nuclear Physics, Saupfercheckweg 1, D–69117 Heidelberg, Germany;2. Institute for Space Systems, Pfaffenwaldring 29, D–70569 Stuttgart, Germany;1. European Space Astronomy Centre, European Space Agency, Madrid, Spain;2. Institute of Space Systems, University of Stuttgart, Germany;3. Department of Astronomy, University of Maryland, College Park, MD, USA;1. Institut für Angewandte Analysis und Numerische Simulation, Fachbereich Mathematik, Universität Stuttgart, Pfaffenwaldring 57, D-70569 Stuttgart, Germany;2. International Research Institute of Stavanger, Thormohlensgt. 55, 5008 Bergen, Norway |
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| Abstract: | We empirically investigate the effects of fiscal policy on bank balance sheets, focusing on episodes of fiscal consolidation. To this aim, we employ a very large data set of individual banks' balance sheets, combined with a newly compiled data set on fiscal consolidations. We find that standard capital adequacy ratios such as the Tier-1 ratio tend to improve following episodes of fiscal consolidation: for the median bank in our sample, a 1% of GDP fiscal consolidation increases the Tier-1 capital ratio by around 1.5 percentage points over two years. Our results suggest that this improvement results from a portfolio re-balancing from private to public debt securities which reduces the risk-weighted value of assets. In fact, if fiscal adjustment efforts are perceived as structural policy changes that improve the sustainability of public finances and, therefore, reduce credit risk, the banks' demand for government securities should increase relative to other assets. |
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| Keywords: | Fiscal consolidations Bank balance sheets Portfolio re-balancing Banking stability E62 G11 G21 H30 |
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