We integrate bank and bond financing into a two-sector neoclassical growth model to examine the stabilization effect of … endogenous bank leverage adjustment. We show that although bank leverage amplifies shocks, the increase of leverage to a decline … in bank equity is an automatic stabilizer in downturns, since it partially offsets the decline of bank lending to …

as a fraction of bank revenues, thus relating politicians' welfare to the size of banks. This induces politicians to … monotonically as political participation rises and/or government guarantees expand. Finally, we suggest that a lobbying tax or …

strength of this automatic stabilization. Second, there is a mix of publicly financed bank re-capitalization, dividend payout … restrictions, and consumption taxes that stimulates a Pareto-improving rapid build-up of bank equity and accelerates economic …: procyclical bank leverage, procyclical bank lending, and countercyclical bond financing. Fourth, the framework preserves its …