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Review of Finance Vol. 27 No. 4 2023

Financial Intermediation, Capital Accumulation, and Crisis Recovery

Hans Gersbach1; Jean-Charles Rochet2,3; Martin Scheffel4

1 Center of Economic Research at ETH Zurich (CER-ETH), Switzerland , and CEPR · 2 Swiss Finance Institute, University of Geneva and University of Zurich , · 3 Toulouse School of Economics · 4 Hanken School of Economics Department of Finance, ,

open access

Abstract

We integrate bank and bond financing into a two-sector neoclassical growth model and identify an automatic stabilization effect due to endogenous bank leverage adjustment. We show that although bank leverage amplifies shocks, the increase of leverage due to a decline in bank equity partially offsets the post crisis decline of bank lending and accelerates economic recovery by reducing the persistence of the bank lending channel. In this case, endogenous leverage adjustment is an automatic stabilizer. Regulatory state-independent capital limits and wage rigidities impair the re-allocation of capital between sectors and weaken this automatic stabilization. A quantitative analysis of the US during the Great Recession shows that the magnitude of automatic stabilization can be significant and informs about potentially high costs of strict capital regulation or wage rigidities during banking crises.

DOI
10.1093/rof/rfac046
Volume
27
Issue
4
Pages
1423-1469
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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