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Bank Leverage Cycles

Galo Nuño Barrau () and Carlos Thomas ()

American Economic Journal: Macroeconomics, 2017, vol. 9, issue 2, 32-72

Abstract: We propose a general equilibrium framework with financial intermediaries subject to endogenous leverage constraints, and assess its ability to explain the observed fluctuations in intermediary leverage and real economic activity. In the model, intermediaries ("banks") borrow in the form of short-term risky debt. The presence of risk-shifting moral hazard gives rise to a leverage constraint, and creates a link between the volatility in bank asset returns and leverage. Unlike TFP or capital quality shocks, volatility shocks produce empirically plausible fluctuations in bank leverage. The model replicates well the fall in leverage, assets, and GDP during the 2007-2009 financial crisis.

JEL-codes: D82 E44 G01 G21 G32 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/mac.20140084
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Related works:
Working Paper: Bank leverage cycles (2013) Downloads
Working Paper: Bank Leverage Cyles (2013) Downloads
Working Paper: Bank leverage cycles (2012) Downloads
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Handle: RePEc:aea:aejmac:v:9:y:2017:i:2:p:32-72