This paper studies the question of the economic scale of financial institutions. We show that banks actively smooth book equity by adjusting payouts to achieve a desired trajectory of book equity. The countercyclical nature of net payouts of financial institutions leads to procyclical book...

This paper studies the economic scale of financial institutions. We show that banks and security broker-dealers actively smooth book equity by adjusting payouts. The smoothing of book equity is associated with procyclical book leverage and procyclical net payouts. In contrast, market leverage...

We reconsider the role of financial intermediaries in monetary economics. We explore the hypothesis that financial intermediaries drive the business cycle by way of their role in determining the price of risk. In this framework, balance sheet quantities emerge as a key indicator of risk appetite...

The financial crisis of 2007-09 highlighted the changing role of financial institutions and the growing importance of the shadow banking system, which grew out of the securitization of assets and the integration of banking with capital market developments. This trend was most pronounced in the...

The financial crisis of 2007-09 highlighted the changing role of financial institutions and the growing importance of the "shadow banking system," which grew out of the securitization of assets and the integration of banking with capital market developments. This trend was most pronounced in the...

The macro risk premium measures the threshold return for real activity that receives funding from savers. We base our argument in this paper on the relationship between the macro risk premium and the growth of financial intermediaries' balance sheets. The spare capacity of their balance sheets...

The macro risk premium measures the threshold return for real activity that receives funding from savers. We base our argument in this paper on the relationship between the macro risk premium and the growth of financial intermediaries’ balance sheets. The spare capacity of their balance sheets...