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Aggregate Lending and Modern Financial Intermediation: Why Bank Balance Sheet Models Are Miscalibrated

Author

Listed:
  • Greg Buchak
  • Gregor Matvos
  • Tomasz Piskorski
  • Amit Seru

Abstract

Existing macroeconomic models focused on bank balance sheet lending are deficient because they do not account for the modern industrial organization of financial intermediation. Utilizing publicly available micro-level lending data, we investigate two increasingly significant margins of adjustment in credit markets: banks’ ability to sell loans and shadow bank activity. These adjustment margins are substantial and vary across time and regions with different incomes. We examine these margins in a parsimonious dynamic quantitative model featuring banks with balance sheet adjustment through loan sales and shadow banks. Using the calibrated model, we illustrate that these margins significantly dampen the immediate contraction following bank capital shock. Recovery is also faster, because profitable loan sales (e.g., securitization) allow banks to build capital faster and because shadow banks pick up lending slack. Failure to account for adjustment margins leads to significant errors when studying policies which rely on financial intermediation pass-through in the level of aggregate lending, its direction, and composition. Our model highlights the tension between bank balance sheet models and data. The model, which forces total lending to depend strongly on bank balance sheet health, must reconcile the weak correlation between bank capital and aggregate lending. These issues can be reconciled with now available data from bank balance sheets, overall bank lending, and aggregate lending, in conjunction with a model of modern financial intermediation.
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Suggested Citation

  • Greg Buchak & Gregor Matvos & Tomasz Piskorski & Amit Seru, 2024. "Aggregate Lending and Modern Financial Intermediation: Why Bank Balance Sheet Models Are Miscalibrated," NBER Macroeconomics Annual, University of Chicago Press, vol. 38(1), pages 239-287.
    • Handle: RePEc:ucp:macann:doi:10.1086/729197
    DOI: 10.1086/729197
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    Cited by:

    1. Umair, Syed Muhammad & Ali, Amjad & Audi, Marc, 2025. "Financial Technology and Financial Stability: Evidence from Emerging Market Economies," MPRA Paper 127487, University Library of Munich, Germany.
    2. Jiang, Erica Xuewei & Matvos, Gregor & Piskorski, Tomasz & Seru, Amit, 2024. "Monetary tightening and U.S. bank fragility in 2023: Mark-to-market losses and uninsured depositor runs?," Journal of Financial Economics, Elsevier, vol. 159(C).
    3. Miroslav Gabrovski & Ioannis Kospentaris & Lucie Lebeau, 2024. "The Macroeconomics of Labor, Credit and Financial Market Imperfections," Working Papers 2409, Federal Reserve Bank of Dallas.

    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G2 - Financial Economics - - Financial Institutions and Services
    • G50 - Financial Economics - - Household Finance - - - General

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