Abstract: Why do certain banks grow large while others remain small, and how does this heterogeneity shape economic activity and policy? To answer this question, I first develop a framework in which banks grow by expanding across regional loan markets and accumulating market share based on differences in screening ability, capital costs, and non-pecuniary loan appeal. I then estimate U.S. bank-level fundamentals using a structurally identified dynamic state-space model and embed these estimates in a quantitative multi-region New Keynesian model. I find that banks' screening ability is the primary driver of bank dynamics: banks that grow large and capture market share are better at screening and pricing risk. This is because, unlike capital costs and loan appeal, screening ability directly affects loan losses and balance-sheet growth. This bank heterogeneity has two macroeconomic consequences: (1) screening ability shapes the allocation of credit across firms, so that changes in screening ability generate short-run fluctuations in aggregate labor productivity, while dispersion across banks lowers its long-run level by roughly 5 percent, and (2) differences in regional banking fundamentals generate the asymmetric transmission of monetary policy, with regions served by weaker banks responding more strongly to a common policy shock.

Abstract: This paper measures the ``animal spirits” of U.S. banks and asks whether they are an important determinant of credit conditions and source of business cycle fluctuations. I first construct a novel semi-structural measure of bank-level sentiment, revealing heterogeneous animal spirits across banks and common dynamics marked by surges in pessimism during crises and excessive optimism during periods of elevated asset prices. I then jointly estimate the contribution of shocks to bank and household sentiment, aggregate demand and supply, financial risk, and monetary policy to fluctuations in macroeconomic conditions using a structural BVAR framework. Bank sentiment shocks explain 38% of the business cycle variation in credit conditions, 10% in output, 22% in prices, and 26% in the policy rate.