Gersbach, Hans, Rochet, Jean-Charles and Scheffel, Martin (2022) Financial Intermediation, Capital Accumulation, and Crisis Recovery. Review of Finance.

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.

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• Financial Intermediation, Capital Accumulation and Crisis Recovery. (deposited 24 Apr 2018 09:31)
  • Financial Intermediation, Capital Accumulation, and Crisis Recovery. (deposited 19 Apr 2023 11:31) [Currently Displayed]