Intermediary Leverage Cycles and Financial Stability

65 Pages Posted: 21 Aug 2012

See all articles by Tobias Adrian

Tobias Adrian

International Monetary Fund

Nina Boyarchenko

Federal Reserve Bank of New York

Multiple version iconThere are 2 versions of this paper

Date Written: August 16, 2012


We develop a theory of financial intermediary leverage cycles in the context of a dynamic model of the macroeconomy. The interaction between a production sector, a financial intermediation sector, and a household sector gives rise to amplification of fundamental shocks that affect real economic activity. The model features two state variables that represent the dynamics of the economy: the net worth and the leverage of financial intermediaries. The leverage of the intermediaries is procyclical owing to risk-sensitive funding constraints. Relative to an economy with constant leverage, financial intermediaries generate higher output and consumption growth and lower consumption volatility in normal times, but at the cost of systemic solvency and liquidity risks. We show that tightening intermediaries’ risk constraints affects the systemic risk-return trade-off, by lowering the likelihood of systemic crises at the cost of higher pricing of risk. Our model thus represents a conceptual framework for cyclical macroprudential policies within a dynamic stochastic general equilibrium model.

Keywords: Systemic risk, macroprudential policy, DSGE, amplification, capital regulation, financial intermediation

JEL Classification: G00, G28, E32, E02

Suggested Citation

Adrian, Tobias and Boyarchenko, Nina, Intermediary Leverage Cycles and Financial Stability (August 16, 2012). Becker Friedman Institute for Research in Economics Working Paper No. 2012-010, Available at SSRN: or

Tobias Adrian

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States


Nina Boyarchenko (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-7339 (Phone)
212-720-1582 (Fax)

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