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(0, 'php', '%message in %file on line %line.', 'a:4:{s:6:\"%error\";s:14:\"strict warning\";s:8:\"%message\";s:62:\"Non-static method view::load() should not be called statically\";s:5:\"%file\";s:88:\"/nfs/c06/h02/mnt/96679/domains/phase2.cfsp.org/html/sites/all/modules/views/views.module\";s:5:\"%line\";i:879;}', 3, '', 'https://rucdjfa.cfsp.org/publications/working-papers/quantitative-model-banking-industry-dynamics', '', '54.36.148.60', 1602376679) in /nfs/c06/h02/mnt/96679/domains/phase2.cfsp.org/html/includes/database.mysql.inc on line 128 A Quantitative Model of Banking Industry Dynamics | CFSP | Consortium on Financial Systems and Poverty
We develop a model of banking industry dynamics to study the relation between commercial bank market structure, business cycles, and borrower default frequencies. The model is calibrated to match a set of key aggregate and cross-sectional statistics for the U.S. banking industry. We then test the model against business cycle moments and important characteristics of banks of different sizes. As in the data, the model generates countercyclical interest rates on loans, bank failure rates, borrower default frequencies, and charge-off rates as well as procyclical loan supply and profit rates. The model is also consistent in generating the negative relations between default frequencies, loan return rates, charge-off rates and variance of returns with bank size. The model is used to study the effects of bank competition and the benefits/costs of policies to subsidize/mitigate bank entry/exit. We quantify the effect that an increase in competition (brought about by lowering entry costs) has on borrower default frequencies and output.