Working Paper Series
Bank Size, Leverage, and Financial
Downturns
Chacko George
Federal Deposit Insurance Corporation
First Version: October 2013
Current Version: March 2015
FDIC CFR WP 2015-01
fdic.gov/cfr
NOTE: Staff working papers are preliminary materials circulated to stimulate discussion and critical
comment. The analysis, conclusions, and opinions set forth here are those of the author(s) alone and do
not necessarily reflect the views of the Federal Deposit Insurance Corporation. References in publications
to this paper (other than acknowledgment) should be cleared with the author(s) to protect the tentative
character of these papers.
Bank Size, Leverage, and Financial
Downturns
Chacko George
Federal Deposit Insurance Corporation
First Version: October 2013
Current Version: March 2015
FDIC CFR WP 2015-01
fdic.gov/cfr
NOTE: Staff working papers are preliminary materials circulated to stimulate discussion and critical
comment. The analysis, conclusions, and opinions set forth here are those of the author(s) alone and do
not necessarily reflect the views of the Federal Deposit Insurance Corporation. References in publications
to this paper (other than acknowledgment) should be cleared with the author(s) to protect the tentative
character of these papers.
Bank Size, Leverage, and Financial Downturns ∗
Chacko George †
First Draft: October 2, 2013
This Draft: March 30, 2015
Abstract
I construct a macroeconomic model with a heterogeneous banking sector and an
interbank lending market. Banks differ in their ability to transform deposits from
households into loans to firms. Bank size differences emerge endogenously in the model,
and in steady state, the induced bank size distribution matches two stylized facts in the
data: bigger banks borrow more on the interbank lending market than smaller banks,
and bigger banks are more leveraged than smaller banks.
I use the model to evaluate the impact of increasing concentration in US banking
on the severity of potential downturns. I find that if the banking sector in 2007 was
only as concentrated as it was in 1992, GDP during the Great Recession would have
declined by much less than it did, and would have recovered faster.
Keywords: Financial crisis, interbank lending, concentration
JEL Classifications: E02, E44, E61, G01, G21
Opinions expressed in this paper are those of the author and not necessarily
those of the FDIC.
∗Thanks to Matthias Kehrig, Olivier Coibion, Andrew Glover, Jacek Rothert, and David Kendrick for all
their guidance, and to Rudiger Bachmann, John Fernald, Francois Gourio, Chris House, Nobuhiro Kiyotaki,
and Ariel Zetlin-Jones for all their helpful comments and suggestions. Thanks also to the seminar participants
at the Federal Reserve Bank of Dallas and the University of Texas for their questions and suggestions.
†FDIC, Center for Financial Research, 550 17th St NW, Washington, DC 20429, email:
cgeorge@fdic.gov.
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Chacko George †
First Draft: October 2, 2013
This Draft: March 30, 2015
Abstract
I construct a macroeconomic model with a heterogeneous banking sector and an
interbank lending market. Banks differ in their ability to transform deposits from
households into loans to firms. Bank size differences emerge endogenously in the model,
and in steady state, the induced bank size distribution matches two stylized facts in the
data: bigger banks borrow more on the interbank lending market than smaller banks,
and bigger banks are more leveraged than smaller banks.
I use the model to evaluate the impact of increasing concentration in US banking
on the severity of potential downturns. I find that if the banking sector in 2007 was
only as concentrated as it was in 1992, GDP during the Great Recession would have
declined by much less than it did, and would have recovered faster.
Keywords: Financial crisis, interbank lending, concentration
JEL Classifications: E02, E44, E61, G01, G21
Opinions expressed in this paper are those of the author and not necessarily
those of the FDIC.
∗Thanks to Matthias Kehrig, Olivier Coibion, Andrew Glover, Jacek Rothert, and David Kendrick for all
their guidance, and to Rudiger Bachmann, John Fernald, Francois Gourio, Chris House, Nobuhiro Kiyotaki,
and Ariel Zetlin-Jones for all their helpful comments and suggestions. Thanks also to the seminar participants
at the Federal Reserve Bank of Dallas and the University of Texas for their questions and suggestions.
†FDIC, Center for Financial Research, 550 17th St NW, Washington, DC 20429, email:
cgeorge@fdic.gov.
1