Staff Reports
On the Scale of Financial Intermediaries
Previous title: "The Cyclicality of Leverage"
October 2015 Number 743
Revised December 2016
JEL classification: E02, E32, G00, G28

Authors: Tobias Adrian, Nina Boyarchenko, and Hyun Song Shin       

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 largely reflects movements in valuation levels as measured by book-to-market ratios. The 2008 crisis caused a structural break, after which the growth rates of the banking and dealer sectors have been subdued relative to pre-crisis levels. We draw conclusions for theories of financial intermediation and for capital regulation.

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