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Bank Capital and Real GDP Growth

By Nina Boyarchenko, Domenico Giannone and Anna Kovner
Working Papers
September 2024, No. 24-08

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.

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