FINANCIAL INTERMEDIARIES AS FIRMS, AND BUSINESS CYCLES

Refet S. GÜRKAYNAK (Federal Reserve Board)

This paper studies the propagation of shocks via financial intermediaries over the business cycle. The leverage of financial intermediaries is shown to be an important determinant of credit conditions. Importantly, in this model the relevance of financial intermediation does not stem from legal restrictions such as reserve or capital requirements, rather, agency costs due to asymmetric information are present for intermediaries as well as for other firms. The model is applicable to all forms of financial intermediation, not only to banks.