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Bank size and macroeconomic shock transmission: Are there economic volatility gains from shrinking large, too big to fail banks?

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  • Uluc Aysun

    (University of Central Florida, Orlando, FL)

Abstract

This paper investigates the transmission of macroeconomic shocks to production in a model that includes a large and a small bank. The two banks are differentiated by parameters that govern their sensitivities to their own and their borrowers’ balance sheets and simulations show that the large (small) bank responds more to demand/financial (supply) shocks. Bank-level evidence generally supports the model’s assumptions but indicates that the large banks’ sensitivities and the sensitivity to borrower balance sheets are more important. Incorporating U.S. macroeconomic shocks into the empirical model illustrates a stronger transmission through large bank lending. Shrinking banks can, therefore, decrease volatility.

Suggested Citation

  • Uluc Aysun, 2013. "Bank size and macroeconomic shock transmission: Are there economic volatility gains from shrinking large, too big to fail banks?," Working Papers 2013-02, University of Central Florida, Department of Economics.
    • Handle: RePEc:cfl:wpaper:2013-02
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    More about this item

    Keywords

    bank size; economic fluctuations; call report data; too big to fail; DSGE model;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy

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