Bank-specific shocks and aggregate leverage: Empirical evidence from a panel of developed countries

This paper investigates the link between shocks in the banking sector and aggregate leverage measured by the credit-to-GDP gap. Using a balanced panel of 15 countries for the 1989-2016 period, we exploit the approach due to Gabaix (2011) to consider banking granular shocks as an indicator of banking distress. We find that banking shocks granger-cause leverage. In particular, positive banking shocks tend to increase the level of leverage and cause departures of the credit-to-GDP ratio from its long-term trend.