A1 - Jacopo Cimadomo
A1 - Sebastian Hauptmeier
A1 - Tom Zimmermann
TI - Fiscal Consolidations and Banking Stability
IS - 2012-32
T3 - Working Papers
KW - Fiscal consolidations
KW - bank balance sheets
KW - portfolio re-balancing
KW - banking stability
N2 - We empirically investigate the effects of fiscal policy on bank balance sheets, focusing on episodes of fiscal consolidation. To this aim, we employ a very rich data set of individual banks’ balance sheets, combined with a newly compiled data set on fiscal consolidations. We find that standard capital adequacy ratios such as the Tier-1 ratio tend to improve following episodes of fiscal consolidation. Our results suggest that this improvement results from a portfolio re-balancing from private to public debt securities which reduces the risk-weighted value of assets. In fact, if fiscal adjustment efforts are perceived as structural policy changes that improve the sustainability of public finances and, therefore, reduces credit risk, the banks’ demand for government securities increases relative to other assets.
ER -