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Financial Flexibility, Bank Capital Flows, and Asset Prices

Authors

  • CHRISTINE A. PARLOUR,

  • RICHARD STANTON,

  • JOHAN WALDEN

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    • Parlour, Stanton, and Walden are with the Haas School of Business, U.C. Berkeley. A previous draft of this paper was entitled “The Credit Channel and the Term Structure.” We thank Jonathan Berk; Harjoat Bhamra; Zhiwu Chen; Gian Luca Clementi; Bob Goldstein; Dwight Jaffee; Hayne Leland; Martin Lettau; Dmitry Livdan; Svein-Arne Persson; Matt Spiegel; Nancy Wallace; James Wilcox; Amir Yaron; seminar participants at the University of British Columbia, the University of Minnesota, Wharton, and Yale; and participants in the 2009 European Finance Association meetings and the 2010 North American Winter meetings of the Econometric Society for helpful comments. We are also grateful to the Editor, an Associate Editor, and two referees for valuable suggestions.


ABSTRACT

In our parsimonious general-equilibrium model of banking and asset pricing, intermediaries have the expertise to monitor and reallocate capital. We study financial development, intraeconomy capital flows, the size of the banking sector, the value of intermediation, expected market returns, and the risk of bank crashes. Asset pricing implications include: a market's dividend yield is related to its financial flexibility, and capital flows should be important in explaining expected returns and the risk of bank crashes. Our predictions are broadly consistent with the aggregate behavior of U.S. capital markets since 1950.

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