Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/229019 
Year of Publication: 
2020
Series/Report no.: 
ECB Working Paper No. 2405
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
This paper studies the impact of cyclical systemic risk on future bank profitability for a large representative panel of EU banks between 2005 and 2017. Using linear local projections we show that high current levels of cyclical systemic risk predict large drops in the average bank-level return on assets (ROA) with a lead time of 3-5 years. Based on quantile local projections we further show that the negative impact of cyclical systemic risk on the left tail of the future bank-level ROA distribution is an order of magnitude larger than on the median. Given the tight link between negative profits and reductions in bank capital, our method can be used to quantify the level of "Bank capital-at-risk" for a given banking system, akin to the concept of "Growth-at-risk". We illustrate how the method can inform the calibration of countercyclical macroprudential policy instruments.
Subjects: 
Local projections
quantile regressions
systemic risk
Growth-at-risk
bank profitability
JEL: 
G01
G17
C22
C54
G21
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-4048-1
Document Type: 
Working Paper

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