Bank Earnings, Credit Supply & the Macroeconomy: Evidence from Canada

2026-06-29

AI Summary

This study investigates whether fluctuations in bank balance sheets affect financial conditions and the macroeconomy through credit supply. Leveraging high-frequency stock price reactions around earnings announcements of Canada’s six largest banks, the authors construct a “purged” measure of bank net worth shocks that isolates exogenous variation by filtering out confounding information, thereby enabling precise identification of the causal effects of credit supply. Combining event-study methods, asset price co-movements, and structural model–based identification strategies, the analysis reveals that positive net worth shocks significantly compress corporate credit spreads, raise valuations in both banking and equity markets, appreciate the Canadian dollar, and stimulate real economic activity over the medium term. These findings are robust across alternative specifications and underscore the macroeconomic significance of the bank capital channel in a concentrated banking system.

Abstract

This paper studies whether news about banks' balance sheets propagates to aggregate financial conditions and macroeconomic activity. We construct high-frequency Canadian bank net-worth shocks using stock-price reactions around earnings announcements of the six large Canadian banks. Guided by a model in which higher intermediary net worth expands credit supply and lowers borrowing spreads, we use the co-movement between bank equity prices and Canadian corporate spreads to purge raw bank equity surprises from contaminating information. Favorable purged credit-supply bank net-worth shocks lower corporate spreads, raise bank valuations and broader equity prices, appreciate the Canadian dollar, and increase real activity over the medium run. The results are robust across specifications, samples, and additional outcomes, and suggest that bank earnings news is macroeconomically relevant in concentrated banking systems.

Problem

• bank earnings
• credit supply
• macroeconomy
• financial conditions
• bank net worth

Innovation

• bank net-worth shocks
• credit supply
• high-frequency identification
• information purification
• macroeconomic propagation