Essays on Wholesale Banking and the Macro-economy

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2020

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Abstract

This dissertation studies how the wholesale banking sector impacts the real economy. As the wholesale banking sector is more sensitive to market conditions compared to the traditional retail banking sector, I investigate how changes in asset return uncertainty can induce fluctuations in real activities through the two sectors in different manners.

In the first chapter, I first document empirically the evolution of bank assets and leverage ratios separately for the wholesale banking sector and the retail banking sector and highlight their differences. Secondly, I propose a theoretical framework that distinctly models two different types of banks to explain the relative growth of wholesale banks and the difference between types of banks in the behavior of leverage. I then investigate the implications of the size of wholesale banking for the business cycle volatility of the real economy. The wholesale banking sector has grown drastically since the 1980s and is more volatile in the data compared to the retail sector. In the model, wholesale banks are more sensitive to risk shocks relative to retail banking due to a difference in the leverage constraint, which leads to more volatile aggregate capital, investment, and output when the wholesale banking sector is more sizable.

The second chapter explores empirically the role of financial intermediaries in the link between macroeocnomic uncertainty and aggregate economic outcomes, with a focus on bank leverage ratios. In VAR models including bank balance sheet variables for both retail and wholesale banking sectors, increased levels of aggregate uncertainty significantly reduce bank leverage ratios and bank assets, and subsequently reduce aggregate investment and production. Compared to traditional retail banking sector, wholesale banking sector is especially sensitive to changes in macro-uncertainty and therefore plays a more important role in this channel.

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