Staff Reports
Bank Capital and Real GDP Growth
Number 950
November 2020

JEL classification: E32, G21, C22

Authors: Nina Boyarchenko, Domenico Giannone, and Anna Kovner

We study the relationship between bank capital ratios and the distribution of future real GDP growth. Growth in the aggregate bank capital ratio corresponds to a smaller left tail of GDP—smaller crisis probability—but at the cost of a smaller right tail of growth outcomes—smaller probability of exuberant growth. This trade-off persists at horizons of up to eight quarters, highlighting the long-range consequences of changes in bank capital. We show that the predictive information in bank capital ratio growth is over and above that contained in real credit growth, suggesting importance for bank capital beyond supplying credit to the nonfinancial sector. Our results suggest that coordination between macroprudential and monetary policy is crucial for supporting stable growth.

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AUTHOR DISCLOSURE STATEMENT(S)
Nina Boyarchenko
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Domenico Giannone
I declare that I have no relevant or material financial interests that relate to the research described in this paper. The bulk of my contribution to the paper was made while I was an employee of the Federal Reserve Bank of New York.

Anna Kovner
I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
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