Fiscal Distress and Banking Performance: The Role of Macroprudential Regulation

Private Bank Deposits and Macro/Fiscal Risk in the Euro-Area

“…7 Indeed, the literature has established a strong feed-back loop between fiscal and banking risk, particularly strong among eurozone countries during the ESDC (Alter and Schüler, 2012;De Bruyckere et al, 2013;Acharya et al, 2014, Gibson et al 2016, Bocola, 2016 Overall, the recent literature motivated by the GFC and the ESDC has provided new insights on bank depositors behaviour, suggesting that during periods of enhanced macro/fiscal risk, savers move away from the classic market discipline paradigm towards a model where savers determine deposits in the domestic banking system as a whole on the basis of aggregate macro/fiscal risk. This feature, incorporated in the DSGE macro models of Clerc et al (2015) and Balfoussia et al (2018), results into a mutation of market discipline from deposits' reallocation within national banking systems to international deposits substitution and/or increasing holdings of cash (see Levy-Yeyati et al, 2010). In the case of the eurozone, both effects have been observed in recent years: In addition to the cross-border deposits substitution found by Kleimeier et al (2013), the studies by Mai (2016) and Gros (2017) document a substantial increase in the use of cash in the euro area during the crisis years.…”

“…In each country aggregate bank deposits are subject to country-specific, nondiversifiable within the domestic banking system, aggregate bank default risk, assumed to be positively corelated with sovereign default risk (see Clerc et al, 2015;Balfoussia et al, 2018).…”

“…Levy-Yeyati et al, 2010;Cubilas et al, 2012Cubilas et al, , 2017 provide evidence suggesting that as domestic macro/fiscal risk increases, domestic savers increasingly move away from the classic market discipline savings paradigm (Berger, 1991), where deposits are determined by idiosyncratic characteristics of individual banks, towards a savings model where savers determine deposits in the domestic banking system as a whole on the basis of aggregate macro/fiscal risk. This savings model, incorporated in DSGE macro models by Clerc et al, (2015) and Balfoussia et al, (2018), results into a mutation of market discipline from deposits' reallocation within national banking systems to international deposits' substitution and/or increasing holdings of cash. In the context of the EMU both phenomena have been observed during the GFC/ESDC period (see Kleimeier et al 2013;and Deutche Bank, 2016;Gros, 2017).…”

The Economic Impact of Pandemics: Real and Financial Transmission Channels

“…The model is calibrated to the Greek economy at a quarterly frequency to match key features of the Greek data. The calibration is based on the work of Balfoussia et al (2019) and the calibration procedure closely follows the approach in Mendicino et al (2018). The calibrated parameters and the long-run solution are summarized in Tables A1-A2 in the Appendix.…”