Banks Interconnectivity and Leverage

Vincenzo Quadrini, Alessandro Barattieri and Laura Moretti ()

No 11502, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In the period that preceded the 2008 crisis, US ï¬ nancial intermediaries have become more leveraged (measured as the ratio of assets over equity) and interconnected (measured as the share of liabilities held by other ï¬ nancial intermediaries). This upward trend in leverage and interconnectivity sharply reversed after the crisis. To understand the factors that could have caused this dynamic, we develop a model where banks make risky investments in the non-ï¬ nancial sector and sell part of their investments to other banks (diversiï¬ cation). The model predicts a positive correlation between leverage and interconnectivity which we explore empirically using balance sheet data for over 14,000 ï¬ nancial intermediaries in 32 OECD countries. We enrich the theoretical model by allowing for Bayesian learning about the likelihood of a bank crisis (aggregate risk) and show that the model can capture the dynamics of leverage and interconnectivity observed in the data.

Keywords: Interconnectivity; Leverage; Risk (search for similar items in EconPapers)
JEL-codes: E21 G11 G21 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://cepr.org/publications/DP11502 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Banks Interconnectivity and Leverage (2017)
Working Paper: Banks Interconnectivity and Leverage (2016)
Working Paper: Banks Interconnectivity and Leverage (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:11502

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP11502

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().