Bank size and macroeconomic shock transmission: Are there economic volatility gains from shrinking large, too big to fail banks?

Uluc Aysun

No 2013-02, Working Papers from University of Central Florida, Department of Economics

Abstract: This paper investigates the transmission of macroeconomic shocks to production in a model that includes a large and a small bank. The two banks are differentiated by parameters that govern their sensitivities to their own and their borrowers’ balance sheets and simulations show that the large (small) bank responds more to demand/financial (supply) shocks. Bank-level evidence generally supports the model’s assumptions but indicates that the large banks’ sensitivities and the sensitivity to borrower balance sheets are more important. Incorporating U.S. macroeconomic shocks into the empirical model illustrates a stronger transmission through large bank lending. Shrinking banks can, therefore, decrease volatility.

Keywords: bank size; economic fluctuations; call report data; too big to fail; DSGE model (search for similar items in EconPapers)
JEL-codes: E02 E32 E44 G21 (search for similar items in EconPapers)
Pages: 41 Pages
Date: 2013-08
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac, nep-mon and nep-spo
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cfl:wpaper:2013-02

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