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Banks funding, leverage, and investment

Alessandro Barattieri, Laura Moretti () and Vincenzo Quadrini

Journal of Financial Economics, 2021, vol. 141, issue 1, 148-171

Abstract: Banks’ funding sources have changed significantly during the last two decades. The share of non-core funding (NCF) was high before the 2008 crisis but declined substantially after the crisis. We propose a general equilibrium model where NCF provides insurance against idiosyncratic risks faced by banks. Insurance makes leverage and investment more attractive, but it also increases the vulnerability of the banking sector to crises. We show that learning about the likelihood of a crisis could have been important for generating the observed dynamics of NCF and leverage, which in turn affected the dynamics of the macro-economy.

Keywords: Market funding; Leverage; Bank crises (search for similar items in EconPapers)
JEL-codes: E32 G11 G21 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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DOI: 10.1016/j.jfineco.2020.06.022

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