What Macroeconomic Shocks Affect the German Banking System? Analysis in an Integrated Micro-Macro Model

Abstract

We analyze what macroeconomic shocks affect the soundness of the German banking system and how this, in turn, feeds back into the macroeconomic environment. Recent turmoils on the international financial markets have shown very clearly that assessing the degree to which banks are vulnerable to macroeconomic shocks is of utmost importance to investors and policy makers. We propose to use a VAR framework that takes feedback effects between the financial sector and the macroeconomic environment into account. We identify responses of a distress indicator for the German banking system to a battery of different structural shocks. We find that monetary policy shocks, fiscal policy shocks, and real estate price shocks have a significant impact on the probability of distress in the banking system. We identify some differences across type of banks and different distress categories, though these differences are often small and do not show any systematic patterns.