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Financial Intermediary Capital

Author

Listed:
  • S. Viswanathan

    (Duke University)

  • Adriano A. Rampini

    (Duke University)

Abstract

This paper proposes a theory of financial intermediaries as collateralization specialists that are better able to collateralize claims than other lenders. Intermediaries require capital as they can borrow against their loans only to the extent that other lenders themselves can collateralize the assets backing the loans. Firms with low net worth borrow from financial intermediaries. Incomplete risk management is optimal for both firms and intermediaries. When the capital of financial intermediaries is limited, it affects the spread between intermediated and direct finance. In a dynamic economy, the capital of the financial intermediary sector is a state variable and affects the dynamics of firm investment, financing, and loan spreads.

Suggested Citation

  • S. Viswanathan & Adriano A. Rampini, 2010. "Financial Intermediary Capital," 2010 Meeting Papers 1071, Society for Economic Dynamics.
    • Handle: RePEc:red:sed010:1071
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    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
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • 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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