سیاست های پولی و مالی (در) ثبات: یک رویکرد خرد یکپارچه کلان

Evidence on central banks’ twin objective, monetary and financial stability, is scarce. We suggest an integrated micro–macro approach with two core virtues. First, we measure financial stability directly at the bank level as the probability of distress. Second, we integrate a microeconomic hazard model for bank distress and a standard macroeconomic model. The advantage of this approach is to incorporate micro information, to allow for non-linearities and to permit general feedback effects between financial distress and the real economy. We base the analysis on German bank and macro data between 1995 and 2004. Our results confirm the existence of a trade-off between monetary and financial stability. An unexpected tightening of monetary policy increases the probability of distress. This effect disappears when neglecting microeffects and non-linearities, underlining their importance. Distress responses are largest for small cooperative banks, weak distress events, and at times when capitalization is low. An important policy implication is that the separation of financial supervision and monetary policy requires close collaboration among members in the European System of Central Banks and national bank supervisors.

This paper investigates interactions between banking sector stability and the real economy. Thereby, we seek to contribute empirical evidence to the ongoing debate among policy makers ECB, 2006 and Deutsche Bundesbank, 2006, academics Benink and Benston, 2005 and Goodhart et al., 2006 and the public (The Economist, 2007), concerning the extent macroeconomic policies and the stability of financial systems depend on each other. Specifically, we investigate how monetary policy affects financial stability and quantify the importance of feedback mechanisms between the real and financial sector. The twin objective of monetary and financial stability climbed the agenda of central bankers as witnessed by a rampant increase in the number of stability reports published by central banks (Oosterloo et al., 2007). This surging interest in twin stability is presumably owed to a fairly successful record to control inflation, but increasing concerns regarding financial stability in light of increasing competition and financial integration (Borio, 2006). In addition, if the financial stability of individual banks differs, this is likely to affect the transmission mechanism of monetary policy, too. For example, Kishan and Opiela (2000) demonstrate that loan supply of poorly capitalized banks reacts more sensitively compared to well-capitalized peers. Empirical evidence on the intricate relation between monetary policy and financial stability is, however, still scarce due to a number of challenges. For starters, the definition of financial stability is surprisingly elusive Poloz, 2006 and Allen and Wood, 2006. Second, central banks’ policies to ensure financial stability vary considerably across countries, thus reflecting both the term’s ambiguity and related problems to measure stability (Oosterloo and de Haan, 2004). Third, a number of scholars emphasize the role of banks for financial stability De Bandt and Hartmann, 2000, Padoa-Schioppa, 2003 and Schinasi and Fell, 2005. But while the number of studies analyzing individual banks’ probabilities of default is fairly abundant,1Jacobson et al. (2005) highlight that only few studies employ microeconomic indicators of financial stability of firms and/or banks to link it to monetary policy and resulting stability responses. Fourth, Goodhart et al., 2004 and Goodhart et al., 2006 emphasize the interdependence of microeconomic agents and macroeconomic performance. Thus, allowing for feedback mechanisms is essential for models that could serve policy makers, for example for stress-testing purposes (ECB, 2006). We aim to make two core contributions. First, we develop an integrated micro–macro approach that incorporates stability indicators at the bank level into the assessment of macroeconomic shocks and responses. Second, we allow explicitly for feedback mechanisms between both the macroeconomic stance and the microeconomic stability of banks. Contrary to extant research, our approach is agnostic about both the timing and direction of the feedback mechanisms. To this end we use macroeconomic and individual data for all universal banks operating in Germany. We analyze which different types of distressed events occur more frequently following a monetary policy shock, as well as which banking groups are predominantly affected on the basis of confidential Bundesbank bank data between 1995 and 2004. Thus, we curb the measurement problem of financial stability, which most studies usually face. Financial stability is defined and measured as a bank’s probability of distress according to the supervisor’s definition of problem banks used for supervisory policy.2 We construct a reduced form micro–macro model which describes the convolution of bank distress probabilities at the micro-level and the macroeconomy. There are a number of reasons to combine the micro and macro perspectives. In a pure macro model, many potentially relevant effects may be obscured due to the loss of information following data aggregation. We find that this effect is substantial. A model based only on financial sector aggregates misleadingly suggests macro–financial feedback to be absent. Moreover, it is not always straightforward to assess how aggregate fluctuations are related to individual bank distress. In turn, with a pure micro approach it is difficult to interpret movements in aggregate variables. Many macro stress-testing exercises incorporate the real economy by specifying some unconditional distribution for aggregate variables. A first drawback of this approach is to preclude financial–macro feedback, also called second-round effects. Second, there is no straightforward economic interpretation of the macro fluctuations, for example in terms of structural shocks. Both are desirable features of models suited for macro stress-testing Goodhart, 2006 and ECB, 2006. By focusing on monetary policy shocks, their effect on and interaction with financial stability, we aim to shed light on the policy implications of macro stress-testing analysis. The microeconometric part of the model links probabilities of bank distress to both bank-specific and macroeconomic variables. We then combine this model with a macro model describing the dynamics of the main macroeconomic variables, as well as their interaction with the financial sector. Subsequently, we identify monetary policy shocks in the combined micro–macro-system. That is, we identify the reduced form in order to understand the effects of structural shocks. Our approach allows for macro–financial as well as financial–macro feedback dynamics. Moreover, this feedback can be both instantaneous and subject to non-linearities. Model simulations provide insight into the complex interdependence between macro shocks and microeconomic banking stability. This model allows us to measure the interactions between monetary policy and financial regulation more explicitly compared to previous studies on macroeconomic stress. Our study is thus akin to Jacobson et al. (2005), who analyze interactions between the Swedish macroeconomy and the corporate sector using vector autoregressive (VAR) techniques combined with probabilities of distress of individual firms derived from a hazard rate model. We differ, however, in four important respects. First, we use confidential data provided by the Deutsche Bundesbank to estimate bank rather than corporate firm distress from a panel of bank-specific financial data and distress events. Therefore, we measure financial stability more directly compared to an approach that examines the financial stance by approximation of bank customers stability Goodhart et al., 2004 and Schinasi and Fell, 2005. Second, we disaggregate our measure of distress and according responses to monetary policy shocks along two dimensions: different degrees of distress and different types of banks, respectively. Third, we differ substantially in the way in which we treat the combined micro–macro-system. Our study contributes methodologically by incorporating simultaneity in the macro–financial interactions. We extend the VAR by a data generating process for distressed events, which is estimated on micro bank data. This combined system resembles a reduced form panel-VAR. We apply identification techniques to this combined micro–macro-system (i.e. construct a SVAR) to analyze the effect of structural shocks. Importantly, we do so without imposing any a priori restrictions on the direction or the timing of interactions between the macroeconomy and the financial sector, but let the data determine their outcome. Fourth, we analyze the largest economy in Europe, namely Germany. To some extent, our policy implications may thus be of economic significance for the European economy as a whole. Our main result is that a contraction in monetary policy increases the average probability of distress of banks by 0.44%, which resembles a third of its annual standard deviation. Hence, the effect is economically significant and indicates a modest trade-off between monetary and financial stability. Second, allowing for feedback effects and non-linearities is crucial. Without modeling individual bank distress probabilities’ reaction to the macroeconomy, a contraction of monetary policy has no significant effect on our measure of financial stability. Consequently, stability studies that neglect the integral role played by microeconomic agents may falsely fail to detect the trade-off between monetary and financial stability. Third, distinguishing different degrees of distress and banking sectors yield heterogeneous responses. Thus, a finer distinction of distress as well as alternative transmission mechanisms at work across banking sectors need to be considered when assessing financial stability. Moreover, the effects of monetary policy on banking sector distress are more severe when the banking sector is poorly capitalized. To the extent that banking distress carries over to banks’ lending behavior, this is in line with the bank lending channel literature. Our results suggest monetary policy transmission is intertwined with the financial health of the banking sector. In sum, the interdependency of the twin objective highlights the necessity for close collaboration between guardians of both price and financial stability. The remainder of this paper is organized as follows. We present our data in Section 2 and discuss the components of the micro–macro model subsequently in Section 3. Our results in Section 4 are reported for aggregate measures of distress and, in addition, according to banking group and distress level. We conclude in Section 5.

We provide in this study empirical evidence on the nexus between financial and monetary stability. Our approach rests on an integrated micro–macro model. Two main contributions are to our knowledge the first of their kind in financial stability analysis. First, we measure the financial stability directly at the bank level as the probability of distress. Second, we integrate a microeconomic hazard model for bank distress with a standard macroeconomic model. The advantage of the approach followed is that it incorporates micro information, allows for non-linearities and allows for general feedback effects between financial distress and the real economy. Our analysis is based on German bank and macro data between 1995 and 2004. Our main findings are as follows. We find evidence of a trade-off between the two main objectives of central banks: monetary and financial stability. An unexpected tightening of monetary policy by one standard deviation increases the average probability of bank distress by 0.44% after 1 year. While we point out that inference regarding the exact timing of dynamics remains subject to care due to data limitations, the magnitude of this trade-off is robust to an alternative specification of the model in quarterly periodicity akin to Jacobson et al. (2005). This significant disturbance of financial stability can not be identified if we employ a model that fails to account for microeconomic and non-linear effects. Hence, the necessity to model the intricate dynamics between macroeconomic measures targeted for (monetary) policy making and microeconomic measures of financial stability measured more directly at the bank level is confirmed. The distinction of responses for different banking sectors exhibit heterogeneous dynamics, which may reflect respectively alternative business models. Publicly owned savings banks react less significantly to a policy shock, potentially due to the refunding function fulfilled by central savings that dampens the immediate impact of monetary shocks. Instead, especially small cooperative banks exhibit pronounced responses. The disaggregation of the baseline result into four increasingly severe distress events further suggests that absorbing failure events, such as restructuring mergers or outright closures of banks, are unlikely triggered by monetary shocks. In turn, the significant increase in the likelihood of weaker distress events underpins that monetary shocks can put banks onto the financial regulator’s watchlists. Finally, we find that the effect of monetary policy shocks on financial stability is substantially larger if bank capitalization is low. The resulting increase in distress is both statistically and economically significant and details a route through which the bank lending channel may generate real effects: an exacerbated PD response for poorly capitalized banks might imply higher re-financing costs of banks that lead to a more pronounced reduction of loan supply compared to well-capitalized banks. In that sense, our results are in line with Kishan and Opiela (2000) who also stress the importance of bank capitalization for monetary transmission. The presence of a trade-off between monetary and financial stability has in our view another important policy implication. Among members of the European Monetary Union the mandates for financial supervision and monetary policy are separated between national central banks and the European Central Bank, respectively. Hence, the importance of harmonized definitions of distress and, more importantly, concerted policies in the European System of Central Banks stressed by, for example Allen and Wood (2006) and Borio (2006), is corroborated.