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
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: E44 E32 G21 E02 (search for similar items in EconPapers)
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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