Financial Intermediation, Capital Accumulation, and Crisis Recovery*

Hans Gersbach, Jean Rochet and Martin Scheffel

Review of Finance, 2023, vol. 27, issue 4, 1423-1469

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.

Keywords: Financial intermediation; Capital accumulation; Banking crises; Macroeconomic shocks; Business cycles; Managing recoveries (search for similar items in EconPapers)
JEL-codes: E21 E32 F44 G21 G28 (search for similar items in EconPapers)
Date: 2023
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Related works:
Working Paper: Financial Intermediation, Capital Accumulation and Crisis Recovery (2025)
Working Paper: Financial Intermediation, Capital Accumulation, and Crisis Recovery (2022)
Working Paper: Financial Intermediation, Capital Accumulation and Crisis Recovery (2019)
Working Paper: Financial Intermediation, Capital Accumulation and Crisis Recovery (2018)
Working Paper: Financial Intermediation, Capital Accumulation and Crisis Recovery (2018)
Working Paper: Financial Intermediation, Capital Accumulation and Crisis Recovery (2017)
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