The real effects of banking shocks: Evidence from OECD countries

This paper studies the impact of shocks to banks' balance sheets on real economic activity. The sample consists of 18 OECD countries observed annually from 1979 to 2003. Using the Rajan-Zingales method, I find that industries that depend more heavily on external finance respond more strongly to bank income shocks, suggesting that banking shocks propagate to the real economy. The bank effect lasts for 2 years, but it is economically significant mainly for large shocks, which are relatively rare. Similar findings are obtained by comparing durable versus non-durable goods and by estimating aggregate bank effects.