Financial shocks, bank balance sheet variables and financial spill-overs in the Euro area

This paper sheds light on the interplay between banks' balance sheet variables and the propagation of credit (demand and supply) and monetary policy shocks in the euro area. The project bridges then two dimensions: macro and banking by using an empirical FAVAR model to combine bank level information and aggregate macroeconomic variables for the euro area. Using a confidential dataset available at the ECB on euro area banks' balance sheet variables, we characterize how shocks in one region of the euro area spill-over to other regions in terms of both individual bank and macroeconomic variables (GDP and inflation). Concerning bank level variables, we characterize how credit supply shocks affect lending to households and to non- financial corporations and how it changes portfolios of loans and securities (including government bonds) of individual financial institutions. Concerning macroeconomic variables, compared to previous literature on the euro area, we are able to better identify the effects of a credit supply shock to the euro area countries' GDP by exploiting our data-rich environment.

A further issue we examine is how bank individual characteristics affect the transmission mechanism of shocks and which bank-characteristic is better able to differentiate the response of individual balance sheet variables: here we stress the role of the liquidity position of each bank, the belonging to an international group and the position in terms of regulatory capital.

Finally, a tentative assessment of the impact of macro-prudential measures and in particular changes to regulatory capital, possibly induced by the introduction of countercyclical capital buffers is provided.