Loan supply and bank capital: A micro-macro linkage. (June 2020)

• Record Type: Journal Article
• Authors: Kick, Thomas; Malinkovich, Swetlana; Merkl, Christian
• Is Part Of: Journal of international money and finance. Volume 104(2020)
• Publication Date: 2020-06
• Subjects: E24 -- E32 -- E44; DSGE -- Bank capital -- Loan supply -- Financial frictions; International finance -- Periodicals; Foreign exchange -- Periodicals; Finances internationales -- Périodiques; Change -- Périodiques; Foreign exchange; International finance; Periodicals; 332.04205
• DOI: 10.1016/j.jimonfin.2020.102166
• Languages: English
• ISSNs: 0261-5606

Abstract

Highlights: Microeconomic bank balance sheet data from Germany. Estimation of banks' loan supply response with respect to capital changes. Modification of the model by Gertler and Karadi (2011). Calibration of the model to the estimated partial equilibrium elasticity. Banks continue to be an important originator and amplifier of macroeconomic shocks. Abstract: In the presence of financial frictions, banks' capital position may constrain their ability to provide loans. The banking sector may thus have important feedback effects on the macroeconomy. To shed new light on this issue, we combine two approaches. First, we use microeconomic balance sheet data from Germany and estimate banks' loan supply response to capital changes. Second, we modify the model of Gertler and Karadi (2011) such that it can be calibrated to the estimated partial equilibrium elasticity of bank loan supply with respect to bank capital. Although the targeted elasticity is remarkably different from the one in the baseline model, banks continue to be an important originator and amplifier of macroeconomic shocks. Thus, combining microeconometric results with macroeconomic modeling provides evidence on the effects of the banking sector on the macroeconomy.