Intermediary balance sheets
AbstractWe document the cyclical properties of the balance sheets of different types of intermediaries. While the leverage of the bank sector is highly procyclical, the leverage of the nonbank financial sector is acyclical. We propose a theory of a two-agent financial intermediary sector within a dynamic model of the macroeconomy. Banks are financed by issuing risky debt to households and face risk-based capital constraints, which leads to procyclical leverage. Households can also participate in financial markets by investing in a nonbank “fund” sector where fund managers face skin-in-the-game constraints, leading to acyclical leverage in equilibrium. The model also reproduces the empirical feature that the banking sector’s leverage growth leads the financial sector’s asset growth, while leverage in the fund sector does not precede growth in financial-sector assets. The procyclicality of the banking sector is due to its risk-based funding constraints, which give a central role to the time variation of endogenous uncertainty.
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Bibliographic InfoPaper provided by Federal Reserve Bank of New York in its series Staff Reports with number 651.
Length: 43 pages
Date of creation: 2013
Date of revision:
Find related papers by JEL classification:
- E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- G00 - Financial Economics - - General - - - General
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-14 (All new papers)
- NEP-BAN-2013-11-14 (Banking)
- NEP-DGE-2013-11-14 (Dynamic General Equilibrium)
- NEP-MAC-2013-11-14 (Macroeconomics)
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