Working Paper

Bank Capital and Real GDP Growth


Abstract: We find evidence that bank capital matters for the distribution of future GDP growth but not its central tendency. Growth in the aggregate bank capital ratio compresses the tails of expected GDP growth, a relationship that is particularly robust in reducing the probability of the worst GDP outcomes. These results suggest a role for regulation to mitigate financial crises, with an additional 100 basis points of bank capital reducing the probability of negative GDP growth by 10 percent at the one-year horizon, even controlling for credit growth and financial conditions, and without a significant drag on expected GDP growth.

Keywords: capital ratios; growth-at-risk; quantile regressions; threshold regressions;

JEL Classification: E32; G21; C22;

https://doi.org/10.21144/wp24-08

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Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Working Paper

Publication Date: 2024-09

Number: 24-08