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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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Author Info

  • 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.

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Bibliographic Info

Paper provided by University of Central Florida, Department of Economics in its series Working Papers with number 2013-02.

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Length: 41 Pages
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:cfl:wpaper:2013-02

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Related research

Keywords: bank size; economic fluctuations; call report data; too big to fail; DSGE model;

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References

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