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

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 capital.