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Financial Intermediation and Macro Finance

Paper Session

Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)

Grand Hyatt, Lone Star Ballroom Salon F
Hosted By: American Economic Association
  • Chair: Xiaoji Lin, University of Minnesota

Lending Competition and Funding Collaboration

Yunzhi Hu
University of North Carolina
Pavel Zryumov
University of Rochester


We study competition and collaboration between a bank and a fintech firm in a market plagued
by adverse selection. The bank has cheaper funding, whereas the fintech firm has better screening
technology. Our innovation is to allow the bank to lend to the fintech, i.e., to finance its
competitors. This partnership funding arrangement lowers the fintech’s funding costs and reduces
the bank’s incentive to compete. We show that two lenders collaborate when the average
quality of the borrower pool is low but compete when the quality gets high. While the fintech
always benefits from partnership funding, the bank receives more profits only when the average
quality is high, at the expense of higher interest rates the borrowers face.

Do Bankers Matter for Main Street? The Financial Intermediary Labor Channel

Yuchen Chen
University of Minnesota and UIUC
Jack Favilukis
University of British Columbia
Xiaoji Lin
University of Minnesota
Xiaofei Zhao
Georgetown University


Financial intermediary (FI) stress, measured by leverage and equity constraints, is emphasized
as an important driver of asset prices and quantities by financial economists. We identify
a new and equally important channel through which FIs affect risk and the real sector: FIs are
stressed when their labor share is high. FI labor share negatively forecasts growth of aggregate
output, investment, and credit; it positively forecasts market excess returns and cost of credit.
In the cross-section, banks with higher labor share lend less and have higher credit risk. Firms
connected to such banks borrow less, pay more to borrow, have higher credit risk, and lower
earnings growth; they also invest less if they are financially constrained. We explain these findings
in a DSGE model where FIs face shocks to the quantity of labor needed to intermediate

Dissecting Mechanisms of Financial Crises: Intermediation and Sentiment

Arvind Krishnamurthy
Stanford University
Wenhao Li
University of Southern California


We develop a model of financial crises with both a financial amplification mechanism, via frictional intermediation, and a role for sentiment, via time-varying beliefs about an illiquidity state. We confront the model with data on credit spreads, equity prices, credit, and output across the financial crisis cycle. In particular, we ask the model to match data on the frothy pre-crisis behavior of asset markets and credit, the sharp transition to a crisis where asset values fall, disintermediation occurs and output falls, and the post-crisis period characterized by a slow recovery in output. Our model with the frictional intermediation mechanism and fluctuations in beliefs provides a parsimonious account of the entire crisis cycle. The model with only the frictional intermediation mechanism misses the frothy pre-crisis behavior; fluctuations in beliefs resolve this problem. On the other hand, modeling the belief variation via either a Bayesian or diagnostic model match the broad patterns, with each missing some targets to different extents. We also show that a lean-against-the-wind policy has a quantitatively similar impact in both versions of the belief model, indicating that policy need not ``get into the minds" of investors and condition on the true belief process.

Dynamic Banking and the Value of Deposits

Patrick Bolton
Imperial College London
Ye Li
University of Washington
Neng Wang
Columbia University
Jinqiang Yang
Shanghai University of Finance and Economics


We propose a theory of banking in which banks cannot perfectly control deposit flows. Facing uninsurable loan and deposit shocks, banks dynamically manage lending, wholesale funding, deposits, and equity. Deposits create value by lowering funding costs. However, when the bank is undercapitalized and at risk of breaching leverage requirements, the marginal value of deposits can turn negative as deposit inflows, by raising leverage, increase the likelihood of costly equity issuance. Banks' inability to fully control leverage distinguishes them from non-depository intermediaries. Our model suggests a re-evaluation of leverage regulations and offers new perspectives on banking in a low interest-rate environment.
JEL Classifications
  • G0 - General
  • E1 - General Aggregative Models