Article

Financial Intermediation, Capital Accumulation, and Crisis Recovery

Hans Gersbach, Jean-Charles Rochet, and Martin Scheffel

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 crisis; macroeconomic shocks; business cycles; bust-boom cycles; managing recoveries;

JEL codes

  • E21: Consumption • Saving • Wealth
  • E32: Business Fluctuations • Cycles
  • F44: International Business Cycles
  • G21: Banks • Depository Institutions • Micro Finance Institutions • Mortgages
  • G28: Government Policy and Regulation

Replaces

Hans Gersbach, Jean-Charles Rochet, and Martin Scheffel, Financial Intermediation, Capital Accumulation and Crisis Recovery, TSE Working Paper, n. 18-885, January 2018.

Reference

Hans Gersbach, Jean-Charles Rochet, and Martin Scheffel, Financial Intermediation, Capital Accumulation, and Crisis Recovery, Review of Finance, vol. rfac046, 2022.

Published in

Review of Finance, vol. rfac046, 2022