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Financial Intermediary Balance Sheet Management

Author

Listed:
  • Tobias Adrian

    (Federal Reserve Bank of New York, New York 10045)

  • Hyun Song Shin

    (Bendheim Center for Finance, Princeton University, Princeton, New Jersey 08540-5290)

Abstract

Conventional discussions of balance sheet management by nonfinancial firms take the set of positive net present value (NPV) projects as given, which in turn determines the size of the assets of the firm. The focus is on the composition of equity and debt in funding such assets. In contrast, the balance sheet management of financial intermediaries reveals that it is equity that behaves like the predetermined variable, and the asset size of the bank or financial intermediary is determined by the degree of leverage that is permitted by market conditions. The relative stickiness of equity reveals possible non-pecuniary benefits to bank owners so that they are reluctant to raise new equity, even during boom periods when equity raising is associated with less stigma, and hence smaller discounts. We explore the empirical evidence for both market-based financial intermediaries such as the Wall Street investment banks, as well as the commercial bank subsidiaries of the large U.S. bank holding companies (BHCs). We further explore the aggregate consequences of such behavior by the banking sector for the propagation of the financial cycle and securitization.

Suggested Citation

  • Tobias Adrian & Hyun Song Shin, 2011. "Financial Intermediary Balance Sheet Management," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 289-307, December.
  • Handle: RePEc:anr:refeco:v:3:y:2011:p:289-307
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-financial-102710-144915
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    References listed on IDEAS

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    1. John Geanakoplos, 2010. "The Leverage Cycle," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 1-65, National Bureau of Economic Research, Inc.
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    3. John Geanakoplos, 2009. "The Leverage Cycle," Cowles Foundation Discussion Papers 1715R, Cowles Foundation for Research in Economics, Yale University, revised Jan 2010.
    4. John Geanakoplos, 2010. "Solving the Present Crisis and Managing the Leverage Cycle," Cowles Foundation Discussion Papers 1751, Cowles Foundation for Research in Economics, Yale University.
    5. John Geanakoplos, 2010. "Solving the present crisis and managing the leverage cycle," Economic Policy Review, Federal Reserve Bank of New York, vol. 16(Aug), pages 101-131.
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    More about this item

    Keywords

    capital; debt; leverage; procyclicality;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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