Bank Size, Leverage, and Financial Downturns

50 Pages Posted: 20 May 2015

See all articles by Chacko George

Chacko George

Federal Deposit Insurance Corporation (FDIC)

Date Written: March 1, 2015

Abstract

I construct a macroeconomic model with a heterogeneous banking sector and an interbank lending market. Banks differ in their ability to transform deposits from households into loans to firms. Bank size differences emerge endogenously in the model, and in steady state, the induced bank size distribution matches two stylized facts in the data: bigger banks borrow more on the interbank lending market than smaller banks, and bigger banks are more leveraged than smaller banks.

I use the model to evaluate the impact of increasing concentration in US banking on the severity of potential downturns. I find that if the banking sector in 2007 was only as concentrated as it was in 1992, GDP during the Great Recession would have declined by much less than it did, and would have recovered faster.

Keywords: Financial crisis, interbank lending, concentration

JEL Classification: E02, E44, E61, G01, G21

Suggested Citation

George, Chacko, Bank Size, Leverage, and Financial Downturns (March 1, 2015). FDIC Center for Financial Research Paper No. 2015-01, Available at SSRN: https://ssrn.com/abstract=2608436 or http://dx.doi.org/10.2139/ssrn.2608436

Chacko George (Contact Author)

Federal Deposit Insurance Corporation (FDIC) ( email )

550 17th Street NW
Washington, DC 20429
United States

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