Banks Adjust Slowly: Evidence and Lessons for Modeling

64 Pages Posted: 12 Jun 2019

See all articles by Juliane Begenau

Juliane Begenau

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Saki Bigio

University of California, Los Angeles (UCLA) - Department of Economics

Jeremy Majerovitz

Massachusetts Institute of Technology (MIT) - Department of Economics

Matias Vieyra

Government of Canada - Bank of Canada

Date Written: April 26, 2019

Abstract

This paper presents five facts on the behavior of U.S. banks between 2007 and 2015 that impose useful restrictions on the formulation of a bank problem. (1) Market to book leverage ratio diverged significantly during the crisis. (2) Book values appear to be backward looking. There is more information content about future bank profitability and loan losses in market values than in book values. (3) Neither market nor regulatory constraints are strictly binding for most banks. (4) Banks operate with a target market leverage ratio. (5) The adjustment behavior back to the target changed fundamentally after the crisis. We present a heterogeneous-bank model that rationalizes these facts and can serve as a building block for future work.

Keywords: Bank Leverage, Target Leverage Ratio, Financial Crisis, Accounting

JEL Classification: G21, E44

Suggested Citation

Begenau, Juliane and Bigio, Saki and Majerovitz, Jeremy and Vieyra, Matias, Banks Adjust Slowly: Evidence and Lessons for Modeling (April 26, 2019). Available at SSRN: https://ssrn.com/abstract=3394601 or http://dx.doi.org/10.2139/ssrn.3394601

Juliane Begenau (Contact Author)

Stanford University - Graduate School of Business ( email )

Stanford, CA 94305
United States
6507245661 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Saki Bigio

University of California, Los Angeles (UCLA) - Department of Economics ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

Jeremy Majerovitz

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States

Matias Vieyra

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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