phbs
The Shifts and the Shocks: Bank Risk, Leverage, and the Macroeconomy
2022-10-26 10:13:00
This paper studies long-run trends in bank risk and their macroeconomic implications. We show that across advanced economies, bank asset risk declined materially between 1870 and 2016. But this trend was accompanied by large increases in leverage, which meant that bank equity risk increased. Moreover, losses on bank assets have become to be associated with increasingly large output gaps. Before 1945, bank asset returns had no excess predictive power for real activity, while afterwards, they have outperformed non-financial returns as a predictor of GDP. We show that this higher predictive power is linked to the secular increases in bank leverage.