Working Paper: NBER ID: w31484
Authors: Greg Buchak; Gregor Matvos; Tomasz Piskorski; Amit Seru
Abstract: Existing macroeconomic models focused on bank balance sheet lending are deficient because they do not account for the modern industrial organization of financial intermediation. Utilizing publicly available micro-level lending data, we investigate two increasingly significant margins of adjustment in credit markets: banks’ ability to sell loans and shadow bank activity. These adjustment margins are substantial and vary across time and regions with different incomes. We examine these margins in a parsimonious dynamic quantitative model featuring banks with balance sheet adjustment through loan sales and shadow banks. Using the calibrated model, we illustrate that these margins significantly dampen the immediate contraction following bank capital shock. Recovery is also faster, because profitable loan sales (e.g., securitization) allow banks to build capital faster and because shadow banks pick up lending slack. Failure to account for adjustment margins leads to significant errors when studying policies which rely on financial intermediation pass-through in the level of aggregate lending, its direction, and composition. Our model highlights the tension between bank balance sheet models and data. The model, which forces total lending to depend strongly on bank balance sheet health, must reconcile the weak correlation between bank capital and aggregate lending. These issues can be reconciled with now available data from bank balance sheets, overall bank lending, and aggregate lending, in conjunction with a model of modern financial intermediation.
Keywords: financial intermediation; bank lending; shadow banks; loan sales; capital shocks
JEL Codes: G01; G21; G50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| modern structure of financial intermediation (G21) | dampens contraction in lending following a bank capital shock (G21) |
| loan sales and shadow bank lending (G21) | dampens contraction in lending following a bank capital shock (G21) |
| bank capital (G21) | lending through loan sales multiplier and shadow bank lending multiplier (E51) |
| loan sales and shadow bank lending (G21) | recovery from capital shocks is faster (F32) |
| bank capitalization (G21) | lending (G21) |
| bank capital (G21) | aggregate lending (G21) |