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Business cycle implications of banking system heterogeneity and complexity

Oliver de Groot and Grzegorz Wesołowski

No 330, NBP Working Papers from Narodowy Bank Polski, Economic Research Department

Abstract: We investigate business cycle implications of banking system complexity and bank heterogeneity in individual leverage. We show that a more complex banking network generates higher individual bank leverage and increases economic volatility. Then, we build a general equilibrium business cycle model with three types of banks: deposittaking, intermediary and lending. Keeping constant aggregate leverage in the banking system, we vary individual leverage and show that an increase in lending bank leverage increases costs of business cycle fluctuations. We argue that this can be mitigated by policymakers taxing the returns of lending banks.

Keywords: Financial intermediation; Network theory; Leverage; Welfare (search for similar items in EconPapers)
JEL-codes: E32 E44 E51 (search for similar items in EconPapers)
Pages: 41
Date: 2020
New Economics Papers: this item is included in nep-ban, nep-dge, nep-fdg and nep-mac
Note: We thank Marcin Kolasa, Paweł Zabczyk and an anonymous reviewer for comments that improved the paper. The views in this paper are those of the authors and do not necessarily reflect the views of Narodowy Bank Polski.
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:330

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