Financial Intermediary Capital
We propose a dynamic theory of financial intermediaries that are better able to collateralize claims than households, that is, have a collateralization advantage. Intermediaries require capital as they can borrow against their loans only to the extent that households themselves can collateralize the assets backing these loans. The net worth of financial intermediaries and the corporate sector are both state variables affecting the spread between intermediated and direct finance and the dynamics of real economic activity, such as investment, and financing. The accumulation of net worth of intermediaries is slow relative to that of the corporate sector. The model is consistent with key stylized facts about macroeconomic downturns associated with a credit crunch, namely, their severity, their protractedness, and the fact that the severity of the credit crunch itself affects the severity and persistence of downturns. The model captures the tentative and halting nature of recoveries from crises.
We thank Nittai Bergman, Doug Diamond, Emmanuel Farhi, Itay Goldstein, Bengt Holmstrom, Nobu Kiyotaki, Peter Kondor, David Martinez-Miera, Martin Oehmke, Vincenzo Quadrini, Alexei Tchistyi, and seminar participants at the IMF, Duke, the MIT theory lunch, BU, the Federal Reserve Bank of New York, Koc, the Stanford macro lunch, UC Berkeley, Mannheim, the Federal Reserve Bank of Richmond, NYU Stern, MIT Sloan, UT Austin, Stanford GSB, the Central Bank of Chile, the Getulio Vargas Foundation, Yale, the ECB, the 2010 SED Annual Meeting, the 2010 Tel Aviv University Finance Conference, the 2011 Jackson Hole Finance Conference, the 2011 FIRS Annual Conference, the 2011 WFA Annual Meeting, the 2011 CEPR European Summer Symposium in Financial Markets, the 2011 FARFE Conference, the 2011 Bank of Italy-CEPR Conference, the 2011 Conference of Swiss Economists Abroad, the 2012 AEA Conference, the 2012 New York Fed-NYU Conference, the 2012 Central Bank of Turkey Conference, the 2012 Paul Woolley Centre Conference, the 2012 Mitsui Finance Symposium, the 2012 Asian Meeting of the Econometric Society, the 2013 AFA Annual Meeting, and the 2013 Conference at UC Davis for helpful comments. This paper subsumes the results on financial intermediation in our 2007 paper "Collateral, financial intermediation, and the distribution of debt capacity," which is now titled "Collateral, risk management, and the distribution of debt capacity" (Rampini and Viswanathan (2010)). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Adriano A Rampini & S Viswanathan, 2019. "Financial Intermediary Capital," The Review of Economic Studies, vol 86(1), pages 413-455. citation courtesy of