We document a sizable effect of oil price fluctuations on US banking variables by estimating an SVAR with sign restrictions as in Baumeister and Hamilton (2019). We find that oil market shocks that lead to a contraction in world economic activity unambiguously lower the amount of bank credit to the US economy, tend to decrease US banks' net worth, and tend to increase the US credit spread. The effects can be strong and long-lasting, or more modest and short-lived, depending on the source of the oil price fluctuations. The effects are stronger for smaller and lower leveraged banks.
We document the existence of a quantitative relevant banks' balance-sheet transmission channel of oil price shocks by estimating a dynamic stochastic general equilibrium model with banking and oil sectors. The associated amplification mechanism implies that those shocks explain a non-negligible share of US GDP growth fluctuations, up to 17 percent, instead of 6 percent absent the banking sector. Also, they mitigated the severity of the Great Recession’s trough. GDP growth would have been 2.48 percentage points more negative in 2008Q4 without the beneficial effect of low oil prices. The estimate without the banking sector is only 1.30 percentage points.
