Financial intermediation and informational efficiency: Predicting business cycles

Theory posits that financial intermediation (FI) spurs economic growth and supports financial system stability by reducing informational asymmetries and agency problems. Most of this literature focuses on bank lending and has limited success in capturing changes in macroeconomic aggregates. We consider a large set of different financial intermediaries to show that aggregate FI assets contain leading information about real GDP, investment, consumption, industrial production, and unemployment. Bank and shadow bank assets alone contain only limited information about future states of the economy. Overall, FI improves informational efficiency of the markets by providing transparent leading signals of the future economic conditions.