Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/19780
Authors: 
De Graeve, Ferre
Kick, Thomas
Year of Publication: 
2008
Series/Report no.: 
Discussion Paper, Series 2: Banking and Financial Supervision 2008,03
Abstract: 
Evidence on the interdependency between monetary policy and the state of the banking system is scarce. We suggest an integrated micro-macro approach with two core virtues. First, we measure the probability of bank distress directly at the bank level. Second, we integrate a microeconomic hazard model for bank distress and a standard macroeconomic model. The advantage of this approach is to incorporate micro information, to allow for non-linearities and to permit general feedback effects between bank distress and the real economy. We base the analysis on German bank and macro data between 1995 and 2004. Our results confirm the existence of a relationship between monetary policy and bank distress. A monetary contraction increases the mean probability of distress. This effect disappears when neglecting micro effects, underlining the crucial importance of the former. Distress responses are economically most significant for weak distress events and at times when capitalization is low.
Subjects: 
Stress testing
bank distress
monetary policy
JEL: 
E58
G21
E52
E42
G28
Document Type: 
Working Paper

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