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Business cycle implications of banking system heterogeneity and complexity

Author

Listed:
  • Oliver de Groot

    (University of Liverpool Management School & CEPR)

  • Grzegorz Wesołowski

    (Narodowy Bank Polski)

Abstract

We investigate business cycle implications of banking system complexity and bank heterogeneity in individual leverage. We show that a more complex banking network generates higher individual bank leverage and increases economic volatility. Then, we build a general equilibrium business cycle model with three types of banks: deposittaking, intermediary and lending. Keeping constant aggregate leverage in the banking system, we vary individual leverage and show that an increase in lending bank leverage increases costs of business cycle fluctuations. We argue that this can be mitigated by policymakers taxing the returns of lending banks.

Suggested Citation

  • Oliver de Groot & Grzegorz Wesołowski, 2020. "Business cycle implications of banking system heterogeneity and complexity," NBP Working Papers 330, Narodowy Bank Polski.
    • Handle: RePEc:nbp:nbpmis:330
    Note: We thank Marcin Kolasa, Paweł Zabczyk and an anonymous reviewer for comments that improved the paper. The views in this paper are those of the authors and do not necessarily reflect the views of Narodowy Bank Polski.
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    More about this item

    Keywords

    Financial intermediation; Network theory; Leverage; Welfare;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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