From Subprime Loans to Subprime Growth? Evidence for the Euro Area

The global financial crisis has highlighted the potential of financial conditions for influencing real economic activity. We examine the linkages between the financial and real sectors in the euro area, finding that (i) bank loan supply responds negatively to declines in bank soundness; (ii) a cutback in bank loan supply has a negative impact on economic activity; (iii) a positive shock to the corporate bond spread lowers industrial output; and (iv) risk indicators for the banking, corporate, and public sectors show an improvement beginning in 2002–03, followed by a major deterioration since 2007. These estimates imply that the currently estimated bank losses would subtract some 2 percentage points from the euro area output (but with considerable uncertainty around the estimates).Financial sector;Credit risk;Banking;Interest rates;Financial risk;Economic models;bond, bank lending, corporate bond, bank loan, bank loans, bank credit, bond spread, banking sector, money market, bonds, probability of default, financial stability, banking system, deposit rates, excess demand, bond spreads, financial institutions, government bond, bondholders, sovereign risk, bond yield, net interest margin, international reserves, government bond yield, bond market, nonperforming loan, present value, equity market, bank soundness, bond financing, recapitalization, corporate bonds, bank funding, bank losses, financial market, sovereign bond, stock price, high yield bond, risk-free interest rate, equity shares, financial markets, deposit rate, financial intermediation, coupon bond, stock market, bond rate, bank size, money market rate, bank assets, bank equity, bank data, corporate bond financing, net present value, banks ? balance sheets, bond issuance, banking crisis, segmentation, bank for international settlements, bank financing, bankers, financial structure, stock prices, financial structures, financial instruments