Monetary policy and bank distress:an integrated micro-macro approach

Evidence on the interdependency between monetary policy and the state of thebanking system is scarce. We suggest an integrated micro-macro approach with twocore virtues. First, we measure the probability of bank distress directly at the banklevel. Second, we integrate a microeconomic hazard model for bank distress and astandard macroeconomic model. The advantage of this approach is to incorporatemicro information, to allow for non-linearities and to permit general feedback effectsbetween bank distress and the real economy. We base the analysis on Germanbank and macro data between 1995 and 2004. Our results conrm the existence ofa relationship between monetary policy and bank distress. A monetary contractionincreases the mean probability of distress. This eect disappears when neglectingmicro eects, underlining the crucial importance of the former. Distress responsesare economically most signicant for weak distress events and at times when capitalizationis low...