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Financial intermediary balance sheet management

Author

Listed:
  • Tobias Adrian
  • Hyun Song Shin

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 firm’s assets. 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 nonpecuniary benefits to bank owners so that they are reluctant to raise new equity, even during boom periods when raising equity 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. 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," Staff Reports 532, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:532
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    References listed on IDEAS

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    1. Viral V. Acharya & S. Viswanathan, 2011. "Leverage, Moral Hazard, and Liquidity," Journal of Finance, American Finance Association, vol. 66(1), pages 99-138, February.
    2. 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.
    3. John Geanakoplos, 2010. "Solving the present crisis and managing the leverage cycle," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 101-131.
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    Citations

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    Cited by:

    1. Ahsan Akbar & Minhas Akbar, 2015. "Approaches to Improving Asset Structure Management in Commercial Banks," Oeconomics of Knowledge, Saphira Publishing House, pages 26-35.
    2. Adrian, Tobias & Liang, J. Nellie, 2014. "Monetary policy, financial conditions, and financial stability," Staff Reports 690, Federal Reserve Bank of New York, revised 01 Dec 2016.
    3. Duarte, Fernando M. & Eisenbach, Thomas M., 2013. "Fire-sale spillovers and systemic risk," Staff Reports 645, Federal Reserve Bank of New York, revised 01 Feb 2015.
    4. Franz Alonso Hamann Salcedo & Rafael Hernández & Luisa Fernanda Silva Escobar & Fernando Tenjo Galarza, 2013. "Credit Pro-cyclicality and Bank Balance Sheet in Colombia," BORRADORES DE ECONOMIA 010695, BANCO DE LA REPÚBLICA.
    5. Fernando Borraz & Gerardo Licandro & Daniela Sola, 2013. "Wage and Price Setting. New Evidence from Uruguayan Firms," Documentos de trabajo 2013008, Banco Central del Uruguay.
    6. Pelizzon, Loriana & Sartore, Domenico, 2013. "Deciphering the Libor and Euribor Spreads during the subprime crisis," The North American Journal of Economics and Finance, Elsevier, pages 565-585.
    7. Juliane M. Begenau, 2015. "Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model," Harvard Business School Working Papers 15-072, Harvard Business School, revised Sep 2016.
    8. Xiao, J., 2016. "Corporate Debt Structure, Precautionary Savings, and Investment Dynamics," Cambridge Working Papers in Economics 1666, Faculty of Economics, University of Cambridge.
    9. Jochen Mierau & Mark Mink, 2016. "A descriptive model of banking and aggregate demand," DNB Working Papers 500, Netherlands Central Bank, Research Department.
    10. Ryan Banerjee & Enrico Sette & Leonardo Gambacorta, 2017. "The real effects of relationship lending," Temi di discussione (Economic working papers) 1133, Bank of Italy, Economic Research and International Relations Area.
    11. Franz Alonso Hamann Salcedo & Rafael Hernández & Luisa Fernanda Silva EScobar & Fernando Tenjo Galarza, 2013. "Credit Pro-cyclicality and Bank Balance Sheet in Colombia," Borradores de Economia 762, Banco de la Republica de Colombia.
    12. Ryan Banerjee & Enrico Sette & Leonardo Gambacorta, 2017. "The real effects of relationship lending," Temi di discussione (Economic working papers) 1133, Bank of Italy, Economic Research and International Relations Area.
    13. Tirupam Goel & Ulf Lewrick & Agnė Nikola Tarashev, 2017. "Bank capital allocation under multiple constraints," BIS Working Papers 666, Bank for International Settlements.
    14. Mary M. Everett, 2015. "Blowing the Bubble: The Global Funding of the Irish Credit Boom," The Economic and Social Review, Economic and Social Studies, pages 339-365.
    15. Franz Hamann & Rafael Hernández & Luisa Silva & Fernando Tenjo, 2014. "Leverage Pro-cyclicality and Bank Balance Sheet in Colombia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 32(73), pages 50-76, July.
    16. Jochen Mierau & Mark Mink, 2016. "A descriptive model of banking and aggregate demand," DNB Working Papers 500, Netherlands Central Bank, Research Department.

    More about this item

    Keywords

    Assets (Accounting) ; Equity ; Debt ; Intermediation (Finance) ; Investment banking ; Bank holding companies;

    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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