Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153957
Authors: 
Nuño, Galo
Thomas, Carlos
Year of Publication: 
2013
Series/Report no.: 
ECB Working Paper 1524
Abstract: 
We document the cyclical dynamics in the balance sheets of US leveraged financial intermediaries in the post-war period. Leverage has contributed more than equity to fluctuations in total assets. All three variables are several times more volatile than GDP. Leverage has been positively correlated with assets and (to a lesser extent) GDP, and negatively correlated with equity. These findings are robust across financial subsectors. We then build a general equilibrium model with banks subject to endogenous leverage constraints, and assess its ability to replicate the facts. In the model, banks borrow in the form of collateralized risky debt. The presence of moral hazard creates a link between the volatility in bank asset returns and bank leverage. We find that, while standard TFP shocks fail to replicate the volatility and cyclicality of leverage, volatility shocks are relatively successful in doing so.
Subjects: 
call option
cross-sectional volatility
Financial intermediaries
leverage
limited liability
Moral Hazard
put option
short-term collateralized debt
JEL: 
E20
G10
G21
Document Type: 
Working Paper

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