Bank Deleveraging : impact on economic growth in the euro area

Details

Supervisors

Smedts, Kristien ; Henrard, Luc

Faculty

Louvain School of Management

Degree label

Master [120] en Ingénieur de gestion

Abstract

This study analyses the impact of bank deleveraging on economic growth in the euro area by means of an analysis on a panel of data composed of sixteen euro area countries over eleven years. It finds that a reduction in the loans granted to the non-financial private sector is harmful for economic growth because it affects mainly two of its major components, namely consumption and investment. These dynamics seem unaffected by the crisis factor even if the 2008 financial crisis has downturned economic activity in Europe. The results also show that the contraction of lending has different implications in core and in peripheral countries. However, in the wider context of the overall deleveraging process, loans and more broadly speaking asset reduction has not been the top priority since banks have so far favoured capital increase measures. This tendency is nonetheless likely to be challenged in the future as manoeuvring room shrinks for banks that have difficulties to raise more capital and that have already exhausted all non-core asset reduction possibilities. While there remain some caveats to the model, this paper may provide a contribution to the discussion about banking regulation and policy in the aftermath of the tremendous financial crisis that massively impacted economies in Europe and elsewhere