Joao Granja

Book Value Risk Management of Banks: Limited Hedging, HTM Accounting, and Rising Interest Rates
Date Posted:Wed, 03 Apr 2024 14:59:06 -0500
In the face of rising interest rates in 2022, banks mitigated interest rate exposure of the accounting value of their assets but left the vast majority of their long-duration assets exposed to interest rate risk. Data from call reports and SEC filings shows that only 6% of U.S. banking assets used derivatives to hedge their interest rate risk, and even heavy users of derivatives left most assets unhedged. The banks most vulnerable to asset declines and solvency runs decreased existing hedges, focusing on short-term gains but risking further losses if rates rose. Instead of hedging the market value risk of bank asset declines, banks used accounting reclassification to diminish the impact of interest rate increases on book capital. Banks reclassified $1 trillion in securities as held-to-maturity (HTM) which insulated these assets book values from interest rate fluctuations. More vulnerable banks were more likely to reclassify. Extending Jiang et al.?s (2023) solvency bank run model, we show that capital regulation could address run risk by encouraging capital raising, but its effectiveness depends on the regulatory capital definitions and can by eroded by the use of HTM accounting. Including deposit franchise value in regulatory capital calculations without considering run risk could weaken capital regulation?s ability to prevent runs. Our findings have implications for regulatory capital accounting and risk management practices in the banking sector.

Book Value Risk Management of Banks: Limited Hedging, Htm Accounting, and Rising Interest Rates
Date Posted:Tue, 02 Apr 2024 09:26:36 -0500
In the face of rising interest rates in 2022, banks mitigated interest rate exposure of the accounting value of their assets but left the vast majority of their long-duration assets exposed to interest rate risk. Data from call reports and SEC filings shows that only 6% of U.S. banking assets used derivatives to hedge their interest rate risk, and even heavy users of derivatives left most assets unhedged. The banks most vulnerable to asset declines and solvency runs decreased existing hedges, focusing on short-term gains but risking further losses if rates rose. Instead of hedging the market value risk of bank asset declines, banks used accounting reclassification to diminish the impact of interest rate increases on book capital. Banks reclassified $1 trillion in securities as held-to-maturity (HTM) which insulated these assets book values from interest rate fluctuations. More vulnerable banks were more likely to reclassify. Extending Jiang et al.?s (2023) solvency bank run model, we show that capital regulation could address run risk by encouraging capital raising, but its effectiveness depends on the regulatory capital definitions and can by eroded by the use of HTM accounting. Including deposit franchise value in regulatory capital calculations without considering run risk could weaken capital regulation?s ability to prevent runs. Our findings have implications for regulatory capital accounting and risk management practices in the banking sector.

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How (In)effective was Bank Supervision During the 2022 Monetary Tightening?
Date Posted:Mon, 02 Oct 2023 17:28:45 -0500
This study examines the effectiveness of bank supervision before, during, and after the 2022 monetary tightening. Supervisors identified emerging interest rate risks and started downgrading riskier banks but only after the Federal Reserve began raising interest rates. Excessive reliance on uninsured deposits was not associated with downgrades. Banks with unrealized losses in AFS securities were more likely downgraded than those with losses in HTM securities. Downgrades subsequently led to reduced interest rate risk exposure and increased liquidity. Results suggest regulators recognized interest rate risks but lacked authority to compel greater risk reduction.

Bank Fragility and Reclassification of Securities into HTM
Date Posted:Tue, 18 Apr 2023 16:03:34 -0500
Held-to-Maturity (HTM) accounting allows banks to avoid using current market prices to value securities on their balance sheet. During 2022, the HTM portfolios of U.S. banks grew from \$2 to $2.75 trillion while their overall holdings of securities remained constant at $6 trillion. U.S. banks transferred $.9 trillion to their HTM portfolios by relabeling securities as HTM. Accounting rules determine that banks must have not only the intent but also the ability to hold securities to maturity when using HTM accounting. I find that banks with lower capital ratios, higher share of run-prone uninsured depositors, and more exposed to interest rate risks were more likely to reclassify securities to HTM during 2021 and 2022.

Bank Fragility and Reclassification of Securities into HTM
Date Posted:Thu, 06 Apr 2023 19:34:30 -0500
Held-to-Maturity (HTM) accounting allows banks to avoid using current market prices to value securities on their balance sheet. During 2022, the HTM portfolios of U.S. banks grew from $2 trillion to $2.75 trillion while their overall holdings of securities remained constant at $6 trillion. U.S. banks collectively transferred at least $.45 trillion to their HTM portfolios simply by relabeling securities that they already had on their portfolios. Accounting rules determine that banks must have not only the intent but also the ability to hold securities to maturity when using HTM accounting. I find that banks with lower capital ratios, higher share of run-prone uninsured depositors, and whose portfolios were more exposed to interest rate risk were more likely to reclassify securities to HTM during 2021 and 2022.

Current Expected Credit Losses and Consumer Loans
Date Posted:Fri, 13 Jan 2023 22:34:19 -0600
We use data from TransUnion, a large U.S. credit bureau covering millions of individual consumer loans, to examine the transition to the Current Expected Credit Loss (CECL) accounting standard and to provide novel evidence about the impact that raising reserve requirements has on banks' pricing and lending decisions in the U.S. consumer lending market. We find that greater reserve requirements following the adoption of CECL induce a statistically significant but economically moderate increase in loan interest rates. The effects are more pronounced for weakly-capitalized banks and even more so for underprivileged individuals borrowing from weakly-capitalized banks. Our evidence informs the ongoing policy debate between standard setters and members of the financial industry about the potential effects of CECL on credit markets.

REVISION: Bank Consolidation and Uniform Pricing
Date Posted:Mon, 08 Aug 2022 11:51:47 -0500
When one bank acquires another, interest rates at acquired branches are generally brought in line with whatever rates acquirers offer. Thus, acquirers do not strongly adjust the rates of acquired branches to reflect local gains in market share. We develop a structural model of the banking sector to simulate equilibrium post-merger deposit rates. The simulated rates when acquirers set uniform deposit rates across all branches best match the observed changes in deposit rates. Antitrust authorities sometimes force acquirers to divest branches to contain local market concentration levels. Our counterfactuals suggest that with uniform pricing, some divestitures could harm consumer welfare.

Update: The Death of a Regulator: Strict Supervision, Bank Lending, and Business Activity
Date Posted:Mon, 18 Apr 2022 00:42:33 -0500
An important question in banking is how strict supervision affects bank lending. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But strict supervision could also change how banks assess and manage loan portfolios and credit risk. Estimating such effects is challenging. We exploit the extinction of the thrift supervisor (OTS) to analyze the effects of strict supervision on bank lending and bank management. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects and show that former OTS banks on average increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks and especially those that changed bank management practices following the supervisory transition. We also show that the supervisory-induced increase in credit supply is not fully explained by a reallocation from mortgage to small ...
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REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Thu, 14 Apr 2022 10:27:07 -0500
An important question in banking is how strict supervision affects bank lending. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But strict supervision could also change how banks assess and manage loan portfolios and credit risk. Estimating such effects is challenging. We exploit the extinction of the thrift supervisor (OTS) to analyze the effects of strict supervision on bank lending and bank management. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects and show that former OTS banks on average increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks and especially those that changed bank management practices following the supervisory transition. We also show that the supervisory-induced increase in credit supply is not fully explained by a reallocation from mortgage to small ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Tue, 12 Apr 2022 23:57:07 -0500
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But stricter supervision could also change how banks assess and manage loans. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) to analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects. We show that former OTS banks increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks, those more affected by the new regime, and cannot be fully explained by a reallocation from mortgage to small business lending after the crisis. These findings suggest that stricter supervision operates not only through ...

Update: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Tue, 12 Apr 2022 06:32:43 -0500
An important question in banking is how strict supervision affects bank lending. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But strict supervision could also change how banks assess and manage loan portfolios and credit risk. Estimating such effects is challenging. We exploit the extinction of the thrift supervisor (OTS) to analyze the effects of strict supervision on bank lending and bank management. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects and show that former OTS banks on average increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks and especially those that changed bank management practices following the supervisory transition. We also show that the supervisory-induced increase in credit supply is not fully explained by a reallocation from mortgage to small ...
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REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Wed, 06 Apr 2022 13:32:32 -0500
An important question in banking is how strict supervision affects bank lending. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But strict supervision could also change how banks assess and manage loan portfolios and credit risk. Estimating such effects is challenging. We exploit the extinction of the thrift supervisor (OTS) to analyze the effects of strict supervision on bank lending and bank management. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects and show that former OTS banks on average increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks and especially those that changed bank management practices following the supervisory transition. We also show that the supervisory-induced increase in credit supply is not fully explained by a reallocation from mortgage to small ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Mon, 04 Apr 2022 05:23:11 -0500
An important question in banking is how strict supervision affects bank lending. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But strict supervision could also change how banks assess and manage loan portfolios and credit risk. Estimating such effects is challenging. We exploit the extinction of the thrift supervisor (OTS) to analyze the effects of strict supervision on bank lending and bank management. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects and show that former OTS banks on average increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks and especially those that changed bank management practices following the supervisory transition. We also show that the supervisory-induced increase in credit supply is not fully explained by a reallocation from mortgage to small ...

REVISION: Bank Consolidation and Uniform Pricing
Date Posted:Mon, 10 Jan 2022 04:16:07 -0600
Though antitrust reviews of bank mergers focus on predicted changes in local market concentration, we show that acquirers adjust interest rates at acquired branches to match their own. Thus, changes in local market concentration are not strongly related to changes in branch rates following a merger. We estimate a model of demand for deposits to evaluate the welfare implications of antitrust decisions that force acquirers to divest branches to prevent increases in local market concentration. We find that forced branch divestitures carry a welfare loss of 5% in markets that would have otherwise seen higher deposit rates at acquired branches.

REVISION: Did the Paycheck Protection Program Hit the Target?
Date Posted:Mon, 27 Sep 2021 19:04:16 -0500
This paper provides a comprehensive assessment of financial intermediation and the economic effects of the Paycheck Protection Program (PPP), a large and novel small business support program that was part of the initial policy response to the COVID-19 pandemic in the US. We use loan-level microdata for all PPP loans and high-frequency administrative employment data to present three main findings. First, banks played an important role in mediating program targeting, which helps explain why some funds initially flowed to regions that were less adversely affected by the pandemic. Second, we exploit regional heterogeneity in lending relationships and individual firm-loan matched data to study the role of banks in explaining the employment effects of the PPP. We find the short- and medium-term employment effects of the program were small compared to the program’s size. Third, many firms used the loans to make non-payroll fixed payments and build up savings buffers which can account for ...

REVISION: Did the Paycheck Protection Program Hit the Target?
Date Posted:Tue, 21 Sep 2021 21:58:14 -0500
This paper provides a comprehensive assessment of financial intermediation and the economic effects of the Paycheck Protection Program (PPP), a large and novel small business support program that was part of the initial policy response to the COVID-19 pandemic in the US. We use loan-level microdata for all PPP loans and high-frequency administrative employment data to present three main findings. First, banks played an important role in mediating program targeting, which helps explain why some funds initially flowed to regions that were less adversely affected by the pandemic. Second, we exploit regional heterogeneity in lending relationships and individual firm-loan matched data to study the role of banks in explaining the employment effects of the PPP. We find the short- and medium-term employment effects of the program were small compared to the program's size. Third, many firms used the loans to make non-payroll fixed payments and build up savings buffers, which can account for ...

REVISION: Product Innovation and Credit Market Disruptions
Date Posted:Mon, 14 Jun 2021 03:09:59 -0500
We provide new evidence that disruptions in firms’ access to credit during the Global Financial
Crisis had significant effects on product innovation in the consumer-goods sector. We combine
highly-granular retail-scan data with lending data and we find that credit-constrained firms
introduced fewer new products, those products were less novel, and the new products sold less
well. Overall, these findings suggest that disruptions to credit markets impair firms’ ability to
compete for profits through new-product offerings.

REVISION: Going the Extra Mile: Distant Lending and Credit Cycles
Date Posted:Sat, 05 Dec 2020 12:10:57 -0600
A simple proxy for a bank’s credit risk – the average physical distance of small corporate borrowers from their bank’s branches – suggests risky lending before the global financial crisis was pro-cyclical and especially so in banks operating in counties where banking was competitive. Surprisingly, such lending took off as the Fed raised interest rates between 2004 and 2007. We argue that bank responses to the rate hikes led to a shift of bank deposits into counties where banking was competitive. Short-horizon bank management recycled these new deposits into loans to more distant counties where banking was not competitive. Unfortunately, given the difficulty of making distant small business loans, loan quality deteriorated. We discuss the conditions under which a normalization of interest rates can lead to a deterioration in loan quality.

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Tue, 17 Nov 2020 10:52:31 -0600
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But stricter supervision could also change how banks assess and manage loans. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) to analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects. We show that former OTS banks increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks, those more affected by the new regime, and cannot be fully explained by a reallocation from mortgage to small business lending after the crisis. These findings suggest that stricter supervision operates not only through ...

REVISION: Did the Paycheck Protection Program Hit the Target?
Date Posted:Tue, 17 Nov 2020 02:39:25 -0600
This paper provides a comprehensive assessment of financial intermediation and the economic effects of the Paycheck Protection Program (PPP), a large and novel small business support program that was part of the initial policy response to the COVID-19 pandemic in the US. We use loan-level microdata for all PPP loans and high-frequency administrative employment data to present three main findings. First, banks played an important role in mediating program targeting, which helps explain why some funds initially ?owed to regions that were less adversely affected by the pandemic. Second, we exploit regional heterogeneity in lending relationships and individual firm-loan matched data to show that the short- and medium-term employment effects of the program were small compared to the program’s size. Third, many firms used the loans to make non-payroll fixed payments and build up savings buffers, which can account for small employment effects and likely reflects precautionary motives in the ...

REVISION: Did the Paycheck Protection Program Hit the Target?
Date Posted:Thu, 15 Oct 2020 02:59:50 -0500
This paper provides a comprehensive assessment of financial intermediation and the economic effects of the Paycheck Protection Program (PPP), a large and novel small business support program that was part of the initial policy response to the COVID-19 pandemic in the US. We use loan-level microdata for all PPP loans and high-frequency administrative employment data to present three main findings. First, banks played an important role in mediating program targeting, which helps explain why some funds initially flowed to regions that were less adversely affected by the pandemic. The top-4 banks alone account for 36% of total pre-policy small business loans, but disbursed less than 3% of all PPP loans in the first round of funding. Second, we exploit regional heterogeneity in lending relationships and individual firm-loan matched data to show that the short- and medium-term employment effects of the program were small compared to the program’s size. Third, many firms used the loans to ...

REVISION: Product Innovation and Credit Market Disruptions
Date Posted:Tue, 22 Sep 2020 04:38:11 -0500
We provide new evidence that disruptions in firm's access to credit during the recent financial crisis had significant effects on product innovation in the consumer-goods sector. We combine highly granular retail-scan data with lending data from the Community Reinvestment Act and Dealscan and we find that credit-constrained firms introduced fewer new products, those products were less novel, and the new products sold less well. The most affected firms were smaller, younger, more dependent of external financing, and make more capital-intensive products, suggesting that credit frictions were responsible for the reduced innovation. Overall, these findings suggest that disruptions to credit markets make firms innovate less and less boldly.

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Thu, 30 Jul 2020 02:58:40 -0500
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But stricter supervision could also change how banks assess and manage loans. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) to analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects. We show that former OTS banks increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks, those more affected by the new regime, and cannot be fully explained by a reallocation from mortgage to small business lending after the crisis. These findings suggest that stricter supervision operates not only through ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Mon, 27 Jul 2020 04:17:08 -0500
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But stricter supervision could also change how banks assess and manage loans. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) to analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects. We show that former OTS banks increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks, those more affected by the new regime, and cannot be fully explained by a reallocation from mortgage to small business lending after the crisis. These findings suggest that stricter supervision operates not only through ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Fri, 24 Jul 2020 11:17:54 -0500
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But stricter supervision could also change how banks assess and manage loans. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) to analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects. We show that former OTS banks increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks, those more affected by the new regime, and cannot be fully explained by a reallocation from mortgage to small business lending after the crisis. These findings suggest that stricter supervision operates not only through ...

REVISION: Did the Paycheck Protection Program Hit the Target?
Date Posted:Tue, 07 Jul 2020 05:56:38 -0500
This paper takes an early look at the Paycheck Protection Program (PPP), a large and novel small business support program that was part of the initial policy response to the COVID-19 pandemic. We use new data on the distribution of the first round of PPP loans and high-frequency micro-level employment data to consider two dimensions of program targeting. First, we do not find evidence that funds ?owed to areas more adversely affected by the economic effects of the pandemic, as measured by declines in hours worked or business shutdowns. If anything, funds ?owed to areas less hard hit. Second, we find significant heterogeneity across banks in terms of disbursing PPP funds, which does not only reflect differences in underlying loan demand. The top-4 banks alone account for 36% of total pre-policy small business loans, but disbursed less than 3% of all PPP loans in the first round. Areas that were significantly more exposed to low-PPP banks received much lower loan allocations. We do not ...

REVISION: Did the Paycheck Protection Program Hit the Target?
Date Posted:Tue, 07 Jul 2020 05:37:54 -0500
This paper takes an early look at the Paycheck Protection Program (PPP), a large and novel small business support program that was part of the initial policy response to the COVID-19 pandemic. We use new data on the distribution of the first round of PPP loans and high-frequency micro-level employment data to consider two dimensions of program targeting. First, we do not find evidence that funds flowed to areas more adversely affected by the economic effects of the pandemic, as measured by declines in hours worked or business shutdowns. If anything, funds flowed to areas less hard hit. Second, we find significant heterogeneity across banks in terms of disbursing PPP funds, which does not only reflect differences in underlying loan demand. The top-4 banks alone account for 36% of total pre-policy small business loans, but disbursed less than 3% of all PPP loans in the first round. Areas that were significantly more exposed to low-PPP banks received much lower loan allocations. We do ...

REVISION: Product Innovation and Credit Market Disruptions
Date Posted:Mon, 22 Jun 2020 04:32:12 -0500
We combine micro-level product barcode data for the consumer goods industry obtained from Nielsen with the Community Reinvestment Act (CRA) and Dealscan lending datasets to provide new evidence that credit market disruptions significantly affected the rate, novelty, and performance of product innovation during the recent financial crisis. We find that credit market disruptions did not affect the rate of introduction of new products on firms' existing product lines but limited their expansion to new product lines. Moreover, products created by firms experiencing credit market disruptions contain fewer novel product characteristics. Consistent with a credit frictions channel, these effects are concentrated in firms that are smaller, younger, and more dependent of external sources of finance. Our estimates further indicate that products introduced in new categories by credit-constrained firms during the financial crisis generate less revenues than products introduced in new categories ...

REVISION: Did the Paycheck Protection Program Hit the Target?
Date Posted:Mon, 11 May 2020 04:10:47 -0500
This paper takes an early look at the Paycheck Protection Program (PPP), a large and novel small business support program that was part of the initial policy response to the COVID-19 pandemic. We use new data on the distribution of PPP loans and high-frequency micro-level employment data to consider two dimensions of program targeting. First, we do not find evidence that funds flowed to areas more adversely affected by the economic effects of the pandemic, as measured by declines in hours worked or business shutdowns. If anything, funds flowed to areas less hard hit. Second, we find significant heterogeneity across banks in terms of disbursing PPP funds, which does not only reflect differences in underlying loan demand. The top-4 banks alone account for 36% of total pre-policy small business loans, but disbursed less than 3% of all PPP loans. Areas that were significantly more exposed to low-PPP banks received much lower loan allocations. As data become available, we will study ...

Did the Paycheck Protection Program Hit the Target?
Date Posted:Tue, 05 May 2020 10:05:54 -0500
This paper provides a comprehensive assessment of financial intermediation and the economic effects of the Paycheck Protection Program (PPP), a large and novel small business support program that was part of the initial policy response to the COVID-19 pandemic in the US. We use loan-level microdata for all PPP loans and high-frequency administrative employment data to present three main findings. First, banks played an important role in mediating program targeting, which helps explain why some funds initially flowed to regions that were less adversely affected by the pandemic. Second, we exploit regional heterogeneity in lending relationships and individual firm-loan matched data to study the role of banks in explaining the employment effects of the PPP. We find the short- and medium-term employment effects of the program were small compared to the program?s size. Third, many firms used the loans to make non-payroll fixed payments and build up savings buffers, which can account for small employment effects and likely reflects precautionary motives in the face of heightened uncertainty. Limited targeting in terms of who was eligible likely also led to many inframarginal firms receiving funds and to a low correlation between regional PPP funding and shock severity. Our findings illustrate how business liquidity support programs affect firm behavior and local economic activity, and how policy trans-mission depends on the agents delegated to deploy it.

REVISION: Did the Paycheck Protection Program Hit the Target?
Date Posted:Wed, 29 Apr 2020 07:52:00 -0500
This paper takes an early look at the Paycheck Protection Program (PPP), a large and novel small business support program that was part of the initial policy response to the COVID-19 pandemic. We use new data on the distribution of PPP loans and high-frequency micro-level employment data to consider two dimensions of program targeting. First, we do not find evidence that funds flowed to areas more adversely affected by the economic effects of the pandemic, as measured by declines in hours worked or business shutdowns. If anything, funds flowed to areas less hard hit. Second, we find significant heterogeneity across banks in terms of disbursing PPP funds, which does not only reflect differences in underlying loan demand. The top-4 banks alone account for 36% of total pre-policy small business loans, but disbursed less than 3% of all PPP loans. Areas that were significantly more exposed to low-PPP banks received much lower loan allocations. As data become available, we will study ...

Did the Paycheck Protection Program Hit the Target?
Date Posted:Mon, 27 Apr 2020 20:45:56 -0500
This paper provides a comprehensive assessment of financial intermediation and the economic effects of the Paycheck Protection Program (PPP), a large and novel small business support program that was part of the initial policy response to the COVID-19 pandemic in the US. We use loan-level microdata for all PPP loans and high-frequency administrative employment data to present three main findings. First, banks played an important role in mediating program targeting, which helps explain why some funds initially flowed to regions that were less adversely affected by the pandemic. Second, we exploit regional heterogeneity in lending relationships and individual firm-loan matched data to study the role of banks in explaining the employment effects of the PPP. We find the short- and medium-term employment effects of the program were small compared to the program?s size. Third, many firms used the loans to make non-payroll fixed payments and build up savings buffers which can account for small employment effects and likely reflects precautionary motives in the face of heightened uncertainty. Limited targeting in terms of who was eligible likely also led to many inframarginal firms receiving funds and to a low correlation between regional PPP funding and shock severity. Our findings illustrate how business liquidity support programs affect firm behavior and local economic activity, and how policy transmission depends on the agents delegated to deploy it.

REVISION: Did the Paycheck Protection Program Hit the Target?
Date Posted:Mon, 27 Apr 2020 11:45:56 -0500
This paper takes an early look at the Paycheck Protection Program (PPP), a large and novel small business support program that was part of the initial policy response to the COVID-19 pandemic. We use new data on the distribution of PPP loans and high-frequency micro-level employment data to consider two dimensions of program targeting. First, we do not find evidence that funds flowed to areas more adversely affected by the economic effects of the pandemic, as measured by declines in hours worked or business shutdowns. If anything, funds flowed to areas less hard hit. Second, we find significant heterogeneity across banks in terms of disbursing PPP funds, which does not only reflect differences in underlying loan demand. The top-4 banks alone account for 36% of total pre-policy small business loans, but disbursed less than 3% of all PPP loans. Areas that were significantly more exposed to low-PPP banks received much lower loan allocations. As data become available, we will study ...

REVISION: Did the Paycheck Protection Program Hit the Target?
Date Posted:Mon, 27 Apr 2020 04:41:18 -0500
This paper takes an early look at the Paycheck Protection Program (PPP), a large and novel small business support program that was part of the initial policy response to the COVID-19 pandemic. We use new data on the distribution of PPP loans and high-frequency micro-level employment data to consider two dimensions of program targeting. First, we do not find evidence that funds flowed to areas more adversely affected by the economic effects of the pandemic, as measured by declines in hours worked or business shutdowns. If anything, funds flowed to areas less hard hit. Second, we find significant heterogeneity across banks in terms of disbursing PPP funds, which does not only reflect differences in underlying loan demand. The top-4 banks alone account for 36% of total pre-policy small business loans, but disbursed less than 3% of all PPP loans. Areas that were significantly more exposed to low-PPP banks received much lower loan allocations. As data become available, we will study ...

Did the Paycheck Protection Program Hit the Target?
Date Posted:Sun, 26 Apr 2020 15:35:50 -0500
This paper provides a comprehensive assessment of financial intermediation and the economic effects of the Paycheck Protection Program (PPP), a large and novel small business support program that was part of the initial policy response to the COVID-19 pandemic in the US. We use loan-level microdata for all PPP loans and high-frequency administrative employment data to present three main findings. First, banks played an important role in mediating program targeting, which helps explain why some funds initially flowed to regions that were less adversely affected by the pandemic. Second, we exploit regional heterogeneity in lending relationships and individual firm-loan matched data to study the role of banks in explaining the employment effects of the PPP. We find the short- and medium-term employment effects of the program were small compared to the program's size. Third, many firms used the loans to make non-payroll fixed payments and build up savings buffers, which can account for small employment effects and likely reflects precautionary motives in the face of heightened uncertainty. Limited targeting in terms of who was eligible likely also led to many inframarginal firms receiving funds and to a low correlation between regional PPP funding and shock severity. Our findings illustrate how business liquidity support programs affect firm behavior and local economic activity, and how policy transmission depends on the agents delegated to deploy it.

REVISION: Did the Paycheck Protection Program Hit the Target?
Date Posted:Sun, 26 Apr 2020 06:36:00 -0500
This paper takes an early look at the Paycheck Protection Program (PPP), a large and novel small business support program that was part of the initial policy response to the COVID-19 pandemic. We use new data on the distribution of PPP loans and high-frequency micro-level employment data to consider two dimensions of program targeting. First, we do not find evidence that funds flowed to areas more adversely affected by the economic effects of the pandemic, as measured by declines in hours worked or business shutdowns. If anything, funds flowed to areas less hard hit. Second, we find significant heterogeneity across banks in terms of disbursing PPP funds, which does not only reflect differences in underlying loan demand. The top-4 banks alone account for 36% of total pre-policy small business loans, but disbursed less than 3% of all PPP loans. Areas that were significantly more exposed to low-PPP banks received much lower loan allocations. As data become available, we will study ...

REVISION: Product Innovation and Credit Market Disruptions
Date Posted:Wed, 12 Feb 2020 12:14:14 -0600
We combine micro-level product barcode data for the consumer goods industry obtained from Nielsen with the Community Reinvestment Act (CRA) and Dealscan lending datasets to provide new evidence that credit market disruptions significantly affected the rate, novelty, and performance of product innovation during the recent financial crisis. We find that credit market disruptions did not affect the rate of introduction of new products on firms' existing product lines but limited their expansion to new product lines. Moreover, products created by firms experiencing credit market disruptions contain fewer novel product characteristics. Consistent with a credit frictions channel, these effects are concentrated in firms that are smaller, younger, and more dependent of external sources of finance. Our estimates further indicate that products introduced in new categories by credit-constrained firms during the financial crisis generate less revenues than products introduced in new categories ...

Bank Consolidation and Uniform Pricing
Date Posted:Wed, 04 Dec 2019 23:49:53 -0600
We evaluate how bank mergers affect consumer welfare when banks set deposit rates uniformly across their branch networks. First, we document that merger-induced changes to local market power are only weakly correlated with pricing decisions. Second, we develop a structural model of the banking sector to simulate equilibrium post-merger deposit rates with and without uniform pricing. The simulated deposit rates from the model with uniform pricing best match the observed changes in deposit rates following bank mergers. We use the model to evaluate antitrust decisions
that force acquirers to divest branches in order to contain local market concentration levels. Our counterfactual exercises suggest that forced divestitures sometimes improve consumer welfare but can also impose substantial consumer welfare losses when antitrust regulators do not consider that uniform pricing practices might lead some acquirers to offer better deposit rates at acquired branches after a merger.

REVISION: Market Concentration and Uniform Pricing: Evidence from Bank Mergers
Date Posted:Wed, 04 Dec 2019 13:49:55 -0600
We show that U.S. banks price deposits almost uniformly across their branches and that this pricing practice is crucial to explain the deposit rate dynamics following bank mergers. We find a strong and sharp post-merger convergence between the deposit rates of the acquired branches and the median deposit rate of the acquirer. This pattern is almost fully explained by adjustments in the deposit rates of the acquired branches, irrespective of whether their rates were above or below those practiced by the acquirer. Acquired branches lose deposits and local market share, especially when they decrease their rates due to uniform pricing. Local competitors respond to changes in deposit rates at the acquired branches by adjusting their own deposit rates in the same direction. We find that pre-merger differences in deposit rates between merged entities explain more of the post-merger evolution of deposit rates than the predicted changes in local market concentration induced by the merger. ...

REVISION: Product Innovation and Credit Market Disruptions
Date Posted:Tue, 03 Dec 2019 06:08:07 -0600
We combine micro-level product barcode data for the consumer goods industry obtained from Nielsen with the Community Reinvestment Act (CRA) and Dealscan lending datasets to provide new evidence that credit market disruptions significantly affected the level, quality, and type of product innovation during the recent financial crisis. We find that credit market disruptions did not affect the rate of introduction of new products on a firm's existing product lines but limited their expansion to new product lines. Moreover, products created by firms experiencing credit market disruptions contain fewer novel product characteristics. Consistent with a credit frictions channel, these effects are concentrated in smaller, younger, and non-publicly listed firms. Our estimates further indicate that products introduced in new categories by credit-constrained firms during the financial crisis are less successful throughout their entire life cycle than products introduced in new categories by the ...

Product Innovation and Credit Market Disruptions
Date Posted:Tue, 05 Nov 2019 20:08:01 -0600
We provide new evidence that disruptions in firms? access to credit during the Global Financial
Crisis had significant effects on product innovation in the consumer-goods sector. We combine
highly-granular retail-scan data with lending data and we find that credit-constrained firms
introduced fewer new products, those products were less novel, and the new products sold less
well. Overall, these findings suggest that disruptions to credit markets impair firms? ability to
compete for profits through new-product offerings.

REVISION: Product Innovation and Credit Market Disruptions
Date Posted:Tue, 05 Nov 2019 10:08:58 -0600
We use detailed product- and firm-level data for the consumer goods industry to provide new evidence that credit market disruptions significantly affected the level, quality, and type of product innovation during the recent financial crisis. We employ two alternative strategies to measure credit market disruptions:

(1) we measure geographic variation in the exposure of a county to lenders that significantly cut back their national supply of small business loans, and

(2) we use preexisting firm-level variation in the need to raise external funds at a time when syndicated lending markets saw a significant contraction.

Using detailed product- and firm-level barcode data, we find that credit market disruptions did not affect the rate of incremental innovation on a firm’s existing products but limited the expansion of their product portfolio to new modules and categories. Consistent with a credit frictions channel, these effects are concentrated in smaller, ...

REVISION: Going the Extra Mile: Distant Lending and Credit Cycles
Date Posted:Wed, 04 Sep 2019 03:45:13 -0500
We examine how competition amongst lenders exacerbates risk taking during a boom using a simple proxy for the risk of a bank’s loan portfolio—the average physical distance of borrowers from banks’ branches. The evolution of lending distances is cyclical, lengthening considerably during an economic upturn and shortening again during the ensuing downturn. More distant small business loans are indeed riskier for the bank, and greater lending distance is reflective of more generalized bank risk taking. As competition in banks’ local lending markets increases, their local lending becomes riskier, and their propensity to make (risky) loans at greater distance increases.

Do Strict Regulators Increase the Transparency of Banks?
Date Posted:Wed, 03 Jul 2019 15:07:21 -0500
We investigate the role that regulatory strictness plays on the enforcement of financial reporting transparency in the U.S. banking industry. Using a novel measure of regulatory strictness in the enforcement of capital adequacy, we show that strict regulators are more likely to enforce restatements of banks' call reports. Further, we find that the effect of regulatory strictness on accounting enforcement is strongest in periods leading up to economic downturns and for banks with riskier asset portfolios. Overall, the results from our study indicate that regulatory oversight plays an important role in enforcing financial reporting transparency, particularly in periods leading up to economic crises. We interpret this evidence as inconsistent with the idea that strict bank regulators put significant weight on concerns about the potential destabilizing effects of accounting transparency.

New: Do Strict Regulators Increase the Transparency of Banks?
Date Posted:Wed, 03 Jul 2019 06:07:36 -0500
We investigate the role that regulatory strictness plays on the enforcement of financial reporting transparency in the U.S. banking industry. Using a novel measure of regulatory strictness in the enforcement of capital adequacy, we show that strict regulators are more likely to enforce restatements of banks' call reports. Further, we find that the effect of regulatory strictness on accounting enforcement is strongest in periods leading up to economic downturns and for banks with riskier asset portfolios. Overall, the results from our study indicate that regulatory oversight plays an important role in enforcing financial reporting transparency, particularly in periods leading up to economic crises. We interpret this evidence as inconsistent with the idea that strict bank regulators put significant weight on concerns about the potential destabilizing effects of accounting transparency.

Going the Extra Mile: Distant Lending and Credit Cycles
Date Posted:Mon, 10 Jun 2019 14:26:37 -0500
We examine the degree to which competition amongst lenders interacts with the cyclicality in lending standards using a simple measure, the average physical distance of borrowers from banks? branches. We propose that this novel measure captures the extent to which lenders are willing to stretch their lending portfolio. Consistent with this idea, we find a significant cyclical component in the evolution of lending distances. Distances widen considerably when credit conditions are lax and shorten considerably when credit conditions become tighter. Next, we show that a sharp departure from the trend in distance between banks and borrowers is indicative of increased risk taking. Finally, we provide evidence that as competition in banks? local markets increases, their willingness to make loans at greater distance increases. Since average lending distance is easily measurable, it is potentially a useful measure for bank supervisors.

New: Going the Extra Mile: Distant Lending and Credit Cycles
Date Posted:Mon, 10 Jun 2019 05:27:50 -0500
We examine the degree to which competition amongst lenders interacts with the cyclicality in lending standards using a simple measure, the average physical distance of borrowers from banks’ branches. We propose that this novel measure captures the extent to which lenders are willing to stretch their lending portfolio. Consistent with this idea, we find a significant cyclical component in the evolution of lending distances. Distances widen considerably when credit conditions are lax and shorten considerably when credit conditions become tighter. Next, we show that a sharp departure from the trend in distance between banks and borrowers is indicative of increased risk taking. Finally, we provide evidence that as competition in banks’ local markets increases, their willingness to make loans at greater distance increases. Since average lending distance is easily measurable, it is potentially a useful measure for bank supervisors.

REVISION: Competition and Voluntary Disclosure: Evidence from Deregulation in the Banking Industry
Date Posted:Sat, 08 Jun 2019 14:20:51 -0500
We use the relaxation of interstate branching restrictions under the Interstate Banking and Branching Efficiency Act (IBBEA) to examine how increases in competition affect incumbents' voluntary disclosure choices. States implemented the IBBEA over several years and to varying degrees, allowing us to identify the effect of increased competition on the voluntary disclosure decisions of both public and private banks. We find that increases in competition are associated with an increase in press releases. Overall, press releases become more negative in tone as entry barriers decrease. However, disclosures by public banks and by banks issuing equity become incrementally positive in tone when entry barriers decrease. Thus, the increase in disclosure is consistent with a dominant incentive to deter entry via negative information, which is mitigated by an incentive to communicate positive information to investors.

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Wed, 08 May 2019 11:05:02 -0500
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes, especially after financial crises. But stricter supervision could also lead to changes in how banks assess loans and manage their loan portfolios. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) – a large change in prudential supervision, affecting ten percent of all U.S. depository institutions. Using this event, we analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. We then analyze the lending effects of this regulatory change and show that former OTS banks increase small business lending by approximately 10 percent. This increase stems primarily from well capitalized banks and those more affected ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Sun, 14 Apr 2019 08:59:04 -0500
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes. But stricter supervision could also change how banks assess and manage loans. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) -- a large change in prudential supervision - to analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects. We show that former OTS banks increase small business lending by roughly 10 percent. This increase is not entirely accounted by a reallocation of mortgage lending and stems primarily from well-capitalized banks and those more affected by the new regime. These findings suggest that stricter supervision operates not only through ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Mon, 25 Mar 2019 16:25:08 -0500
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes. But stricter supervision could also change how banks assess and manage loans. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) -- a large change in prudential supervision - to analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects. We show that former OTS banks increase small business lending by roughly 10 percent. This increase is not entirely accounted by a reallocation of mortgage lending and stems primarily from well-capitalized banks and those more affected by the new regime. These findings suggest that stricter supervision operates not only through ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Tue, 18 Dec 2018 05:36:46 -0600
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes, especially after financial crises. But stricter supervision could also lead to changes in how banks assess loans and manage their loan portfolios. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) – a large change in prudential supervision, affecting ten percent of all U.S. depository institutions. Using this event, we analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. We then analyze the lending effects of this regulatory change and show that former OTS banks increase small business lending by approximately 10 percent. This increase stems primarily from well capitalized banks and those more affected ...

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Mon, 17 Dec 2018 05:30:41 -0600
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes, especially after financial crises. But stricter supervision could also lead to changes in how banks assess loans and manage their loan portfolios. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) – a large change in prudential supervision, affecting ten percent of all U.S. depository institutions. Using this event, we analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. We then analyze the lending effects of this regulatory change and show that former OTS banks increase small business lending by approximately 10 percent. This increase stems primarily from well capitalized banks and those more affected ...

The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Sun, 16 Dec 2018 01:56:19 -0600
We exploit the extinction of the thrift supervisor (OTS) to analyze the effects of supervision on bank lending and bank management. We first show that the OTS replacement resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects and show that former OTS banks on average increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks and especially in banks that changed management practices following the supervisory transition. These findings suggest that stricter supervision operates not only through the enforcement of loss recognition and capital adequacy, but can also act as a catalyst for operational changes that correct deficiencies in bank management and lending practices, which in turn increase lending.

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Sat, 15 Dec 2018 15:57:35 -0600
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes, especially after financial crises. But stricter supervision could also lead to changes in how banks assess loans and manage their loan portfolios. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) – a large change in prudential supervision, affecting ten percent of all U.S. depository institutions. Using this event, we analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. We then analyze the lending effects of this regulatory change and show that former OTS banks increase small business lending by approximately 10 percent. This increase stems primarily from well capitalized banks and those more affected ...

REVISION: Do Strict Regulators Increase the Transparency of the Banks?
Date Posted:Fri, 14 Dec 2018 11:36:08 -0600
We investigate the role that regulatory strictness plays on the enforcement of financial reporting transparency in the U.S. banking industry. Using a novel measure of regulatory strictness in the enforcement of capital adequacy, we show that strict regulators are more likely to enforce restatements of banks’ call reports. Further, we find that the effect of regulatory strictness on accounting enforcement is strongest in periods leading up to economic downturns and for banks with riskier asset portfolios. Overall, the results from our study indicate that regulatory oversight plays an important role in enforcing financial reporting transparency, particularly in periods leading up to economic crises. We interpret this evidence as inconsistent with the idea that strict bank regulators put significant weight on concerns about the potential destabilizing effects of accounting transparency.

Going the Extra Mile: Distant Lending and Credit Cycles
Date Posted:Tue, 13 Nov 2018 18:44:23 -0600
A simple proxy for a bank?s credit risk ? the average physical distance of small corporate borrowers from their bank?s branches ? suggests risky lending before the global financial crisis was pro-cyclical and especially so in banks operating in counties where banking was competitive. Surprisingly, such lending took off as the Fed raised interest rates between 2004 and 2007. We argue that bank responses to the rate hikes led to a shift of bank deposits into counties where banking was competitive. Short-horizon bank management recycled these new deposits into loans to more distant counties where banking was not competitive. Unfortunately, given the difficulty of making distant small business loans, loan quality deteriorated. We discuss the conditions under which a normalization of interest rates can lead to a deterioration in loan quality.

REVISION: Going the Extra Mile: Distant Lending and Credit Cycles
Date Posted:Tue, 13 Nov 2018 08:44:23 -0600
We examine the degree to which competition amongst lenders interacts with the cyclicality in lending standards using a simple measure, the average physical distance of borrowers from banks’ branches. We propose that this novel measure captures the extent to which lenders are willing to stretch their lending portfolio. Consistent with this idea, we find a significant cyclical component in the evolution of lending distances. Distances widen considerably when credit conditions are lax and shorten considerably when credit conditions become tighter. Next, we show that a sharp departure from the trend in distance between banks and borrowers is indicative of increased risk taking. Finally, we provide evidence that as competition in banks’ local markets increases, their willingness to make loans at greater distance increases. Since average lending distance is easily measurable, it is potentially a useful measure for bank supervisors.

Going the Extra Mile: Distant Lending and Credit Cycles
Date Posted:Mon, 29 Oct 2018 13:07:21 -0500
The average distance of U.S. banks from their small corporate borrowers increased before the global financial crisis, especially for banks in competitive counties. Small distant loans are harder to make, so loan quality deteriorated. Surprisingly, such lending intensified as the Fed raised interest rates from 2004. Why? We show banks? responses to higher rates led to bank deposits shifting into competitive counties. Short-horizon bank management recycled these inflows into risky loans to distant uncompetitive counties. Thus, rate hikes, competition, and managerial short-termism explain why inflows ?burned a hole? in banks? pockets and, more generally, increased risky lending.

REVISION: Competition and Voluntary Disclosure: Evidence from Deregulation in the Banking Industry
Date Posted:Sun, 15 Jul 2018 04:26:23 -0500
We use the relaxation of interstate branching restrictions under the Interstate Banking and Branching Efficiency Act (IBBEA) to examine how increases in competition affect incumbents' voluntary disclosure choices. States implemented the IBBEA over several years and to varying degrees, allowing us to identify the effect of increased competition on the voluntary disclosure decisions of both public and private banks. We find that increases in competition are associated with an increase in press releases. Overall, press releases become more negative in tone as entry barriers decrease. However, disclosures by public banks and by banks issuing equity become incrementally positive in tone when entry barriers decrease. Thus, the increase in disclosure is consistent with a dominant incentive to deter entry via negative information, which is mitigated by an incentive to communicate positive information to investors.

Disclosure Regulation in the Commercial Banking Industry: Lessons From the National Banking Era
Date Posted:Sat, 05 May 2018 17:13:39 -0500
I exploit variation in the adoption of disclosure and supervisory regulation across U.S. states to examine their impact on the development and stability of commercial banks. The empirical results suggest that the adoption of state?level requirements to report financial statements in local newspapers is associated with greater stability and development of commercial banks. I also examine which political constituencies influence the adoption of disclosure and supervisory regulation. I find that powerful landowners and small private banks are associated with late adoption of these regulations. These findings suggest that incumbent groups oppose disclosure rules because the passage of such rules threatens their private interests.

New: Disclosure Regulation in the Commercial Banking Industry: Lessons From the National Banking Era
Date Posted:Sat, 05 May 2018 08:13:39 -0500
I exploit variation in the adoption of disclosure and supervisory regulation across U.S. states to examine their impact on the development and stability of commercial banks. The empirical results suggest that the adoption of state-level requirements to report financial statements in local newspapers is associated with greater stability and development of commercial banks. I also examine which political constituencies influence the adoption of disclosure and supervisory regulation. I find that powerful landowners and small private banks are associated with late adoption of these regulations. These findings suggest that incumbent groups oppose disclosure rules because the passage of such rules threatens their private interests.

REVISION: Competition and Voluntary Disclosure: Evidence from Deregulation in the Banking Industry
Date Posted:Thu, 08 Feb 2018 05:52:12 -0600
We use the relaxation of interstate branching restrictions under the Interstate Banking and Branching Efficiency Act (IBBEA) to examine how increases in competition affect incumbents' voluntary disclosure choices. States implemented the IBBEA over several years and to varying degrees, allowing us to identify the effect of increased competition on the voluntary disclosure decisions of both public and private banks. We find that increases in competition are associated with an increase in press releases. Overall, press releases become more negative in tone as entry barriers decrease. However, disclosures by public banks and by banks issuing equity become incrementally positive in tone when entry barriers decrease. Thus, the increase in disclosure is consistent with a dominant incentive to deter entry via negative information, which is mitigated by an incentive to communicate positive information to investors.

The Death of a Regulator: Strict Supervision, Bank Lending, and Business Activity
Date Posted:Wed, 03 Jan 2018 09:30:41 -0600
We exploit the extinction of the thrift supervisor (OTS) to analyze the effects of supervision on bank lending and bank management. We first show that the OTS replacement resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects and show that former OTS banks on average increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks and especially in banks that changed management practices following the supervisory transition. These findings suggest that stricter supervision operates not only through the enforcement of loss recognition and capital adequacy, but can also act as a catalyst for operational changes that correct deficiencies in bank management and lending practices, which in turn increase lending.

The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Thu, 28 Dec 2017 14:14:41 -0600
We exploit the extinction of the thrift supervisor (OTS) to analyze the effects of supervision on bank lending and bank management. We first show that the OTS replacement resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects and show that former OTS banks on average increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks and especially in banks that changed management practices following the supervisory transition. These findings suggest that stricter supervision operates not only through the enforcement of loss recognition and capital adequacy, but can also act as a catalyst for operational changes that correct deficiencies in bank management and lending practices, which in turn increase lending.

REVISION: The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Date Posted:Thu, 28 Dec 2017 04:14:42 -0600
An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes, especially after financial crises. But stricter supervision could also lead to changes in how banks assess loans and manage their loan portfolios. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) – a large change in prudential supervision, affecting ten percent of all U.S. depository institutions. Using this event, we analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. We then analyze the lending effects of this regulatory change and show that former OTS banks increase small business lending by approximately 10 percent. This increase stems primarily from well-capitalized banks and those more affected ...

REVISION: Competition and Voluntary Disclosure: Evidence from Deregulation in the Banking Industry
Date Posted:Sun, 13 Aug 2017 03:37:51 -0500
We use the relaxation of interstate branching restrictions under the Interstate Banking and Branching Efficiency Act (IBBEA) to examine how increases in competition affect incumbents' voluntary disclosure choices. States implemented the IBBEA over several years and to varying degrees, allowing us to identify the effect of increased competition on the voluntary disclosure decisions of both public and private banks. We find that increases in competition are associated with an increase in press releases. Overall, press releases become more negatively toned as entry barriers decrease, particularly in states that severely restricted entry prior to the IBBEA. However, disclosures by public banks and by banks issuing equity become incrementally positively toned when entry barriers decrease. Thus, the increase in disclosure is consistent with a dominant incentive to deter entry via negative information, but a mitigating incentive to communicate positive information to investors.

REVISION: Competition and Voluntary Disclosure: Evidence from Deregulation in the Banking Industry
Date Posted:Wed, 16 Nov 2016 13:52:40 -0600
We use the relaxation of interstate branching restrictions under the Interstate Banking and Branching Efficiency Act (IBBEA) to examine how increases in competition affect incumbents' voluntary disclosure choices. States implemented the IBBEA over several years and to varying degrees, allowing us to identify the effect of increased competition on the voluntary disclosure decisions of both public and private banks. We find that increases in competition are associated with an increase in press releases. Overall, press releases become more negatively toned as entry barriers decrease, particularly in states that severely restricted entry prior to the IBBEA. However, disclosures become incrementally positively toned around stock issuances when entry barriers decrease. Thus, the increase in disclosure is consistent with heightened incentives to communicate positive information to investors and negative information to potential competitors.

REVISION: Disclosure Regulation in the Commercial Banking Industry: Lessons from the National Banking Era
Date Posted:Fri, 30 Sep 2016 00:25:33 -0500
I exploit variation in the adoption of disclosure and supervisory regulation across U.S. states to examine their impact on the development and stability of commercial banks. The empirical results suggest that the adoption of state-level requirements to report financial statements in local newspapers are associated with greater stability and development of commercial banks. I also examine which political constituencies influence the adoption of disclosure and supervisory regulation. I find that powerful landowners and small private banks are associated with late adoption of these regulations. These findings suggest that incumbent groups oppose disclosure rules because their passage threatens their private interests.

REVISION: Do Strict Regulators Increase the Transparency of the Banking System?
Date Posted:Thu, 26 May 2016 00:43:32 -0500
We investigate the role of regulatory incentives on the enforcement of financial reporting transparency in the U.S. banking industry. The previous literature suggests that banking regulators use discretion to facilitate regulatory forbearance. Yet, is not clear whether these actions result from lax oversight or whether they are necessary to prevent further financial instability. Using a novel measure of the quality of regulatory enforcement, we show that strict regulators are more likely to enforce income-reducing reporting choices by forcing banks to restate their overly aggressive call reports. Further, we find that the effect of regulatory strictness on accounting enforcement is strongest in periods leading up to economic downturns and for banks with riskier asset portfolios. Overall, the results from our analyses are consistent with the notion that regulatory incentives play an important role in enforcing financial reporting transparency, particularly in periods leading up to ...

REVISION: Competition and Voluntary Disclosure: Evidence from Deregulation in the Banking Industry
Date Posted:Wed, 24 Feb 2016 07:29:51 -0600
We use the relaxation of interstate branching restrictions under the Interstate Banking and Branching Efficiency Act (IBBEA) to examine how increases in competition affect incumbents' voluntary disclosure choices. States implemented the IBBEA over several years and to varying degrees, allowing us to identify the effect of increased competition on the voluntary disclosure decisions of both public and private banks. We find that increases in competition are associated with increases in the level of voluntary disclosure. Specifically, we find an overall increase in press releases. Consistent with heightened incentives to communicate with investors, customers, and regulators, we document an increase in press releases containing forward-looking, product-related, and capital structure-related disclosures. Consistent with heightened incentives to communicate with competitors, we find that the tone of press releases becomes more negative after entry barriers are lowered.

REVISION: Competition and Voluntary Disclosure: Evidence from Deregulation in the Banking Industry
Date Posted:Mon, 21 Dec 2015 05:23:29 -0600
We use the relaxation of interstate branching restrictions under the Interstate Banking and Branching Efficiency Act (IBBEA) to examine how increases in competition affect incumbents' voluntary disclosure choices. States implemented the IBBEA over several years and to varying degrees, allowing us to identify the effect of increased competition on the voluntary disclosure decisions of both public and private banks. We find that increases in competition are associated with increases in the level of voluntary disclosure. Specifically, we find an overall increase in press releases. Consistent with heightened incentives to communicate with investors, customers, and regulators, we document an increase in press releases containing forward-looking, product- related, and capital structure-related disclosures. We find that the tone of press releases becomes more negative after entry barriers are lowered, which supports the prediction that incumbents increase the disclosure of bad news to deter ...

Do Strict Regulators Increase the Transparency of the Banks?
Date Posted:Sun, 21 Jun 2015 12:34:09 -0500
We investigate the role that regulatory strictness plays on the enforcement of financial reporting transparency in the U.S. banking industry. Using a novel measure of regulatory strictness in the enforcement of capital adequacy, we show that strict regulators are more likely to enforce restatements of banks? call reports. Further, we find that the effect of regulatory strictness on accounting enforcement is strongest in periods leading up to economic downturns and for banks with riskier asset portfolios. Overall, the results from our study indicate that regulatory oversight plays an important role in enforcing financial reporting transparency, particularly in periods leading up to economic crises. We interpret this evidence as inconsistent with the idea that strict bank regulators put significant weight on concerns about the potential destabilizing effects of accounting transparency.

REVISION: Do Strict Regulators Increase the Transparency of the Banking System?
Date Posted:Sun, 21 Jun 2015 03:34:10 -0500
We investigate the role of regulatory incentives on the enforcement of financial reporting transparency in the U.S. banking industry. The previous literature suggests that banking regulators use discretion to facilitate regulatory forbearance. Yet, is not clear whether these actions result from lax oversight or whether they are necessary to prevent further financial instability. Using a novel measure of the quality of regulatory enforcement, we show that strict regulators are more likely to enforce income-reducing reporting choices by forcing banks to restate their overly aggressive call reports. Further, we find that the effect of regulatory strictness on accounting enforcement is strongest in periods leading up to economic downturns and for banks with riskier asset portfolios. Overall, the results from our analyses are consistent with the notion that regulatory incentives play an important role in enforcing financial reporting transparency, particularly in periods eleading up to ...

REVISION: Selling Failed Banks
Date Posted:Thu, 14 May 2015 02:28:12 -0500
We show that the allocation of failed banks in the Great Recession was likely distorted because potential acquirers of these banks were poorly capitalized. We illustrate this phenomenon within a model of auctions with budget constraints. In our model poor capitalization of some potential acquirers drives a wedge between their willingness to pay and the ability to pay for a failed bank. Using our framework, we infer three characteristics that drive potential acquirers’ willingness to pay for a failed bank in the data: geographic proximity, bank specialization, and increased market concentration. Consistent with predictions of our model, we find that low capitalization of potential acquirers decreases their ability to acquire a failed bank. Finally, we show that the wedge between potential acquirers’ willingness and ability to pay distorts the allocation of failed banks. The costs of this misallocation are substantial, as measured by the additional resolution costs of the FDIC. These ...

REVISION: Competition and Voluntary Disclosure: Evidence from Deregulation in the Banking Industry
Date Posted:Sat, 04 Apr 2015 00:36:00 -0500
We use the relaxation of interstate branching restrictions under the Interstate Banking and Branching Efficiency Act (IBBEA) to examine how increases in competition affect incumbents' voluntary disclosure choices. States implemented the IBBEA over several years and to varying degrees, allowing us to identify the effect of increased competition on the voluntary disclosure decisions of both public and private banks. We find that increases in competition are associated with increases in the level of voluntary disclosure. Specifically, we find an overall increase in press releases and, in particular, an increase in press releases containing forward-looking, earnings-related, and capital structure-related disclosures. We further provide evidence that banks trade-off incentives to appeal to the capital markets with the incentive to deter potential competitors. Increases in voluntary disclosure are higher in local markets that have low levels of concentration prior to deregulation and are ...

REVISION: Disclosure Regulation in Commercial Banking: Lessons from the National Banking Era
Date Posted:Wed, 26 Nov 2014 00:18:17 -0600
I exploit variation in the adoption of disclosure and supervision regulation across U.S. states to examine their impact on the development and stability of commercial banks. The empirical results suggest that the adoption of state-level requirements to report financial statements in local newspapers are associated with greater stability and development of commercial banks. I also examine which political constituencies influence the adoption of disclosure and supervision regulation. I find that powerful landowners and small private banks are associated with late adoption of these regulations. These findings suggest that incumbent groups oppose disclosure rules because their passage threatens their private interests.

Disclosure Regulation in the Commercial Banking Industry: Lessons from the National Banking Era
Date Posted:Sat, 04 Oct 2014 19:47:05 -0500
I exploit variation in the adoption of disclosure and supervisory regulation across U.S. states to examine their impact on the development and stability of commercial banks. The empirical results suggest that the adoption of state-level requirements to report financial statements in local newspapers are associated with greater stability and development of commercial banks. I also examine which political constituencies influence the adoption of disclosure and supervisory regulation. I find that powerful landowners and small private banks are associated with late adoption of these regulations. These findings suggest that incumbent groups oppose disclosure rules because their passage threatens their private interests.

REVISION: Disclosure Regulation in Commercial Banking: Lessons from the National Banking Era
Date Posted:Sat, 04 Oct 2014 10:47:07 -0500
I exploit variation in the adoption of disclosure and supervision regulation across states to examine their impact on the development and stability of commercial banks. The empirical results suggest that requirements to report financial statements in local newspapers promote the stability and development of banks, while periodic on-site examinations do not. I also analyze the 1888 Illinois and Michigan popular vote on their banking laws. Counties with powerful landowners voted less favorably for the enactment of these laws. The findings suggest that incumbent groups oppose disclosure rules because their passage foster financial development and threaten their private interests.

Selling Failed Banks
Date Posted:Mon, 25 Aug 2014 09:42:00 -0500
We study the recent episode of bank failures and provide simple facts to better understand who acquires failed banks and which forces drive the losses that the FDIC realizes from these sales. We document three distinct forces related to the allocation of failed banks to potential acquirers. First, a geographically proximate bank is significantly more likely to acquire a failed bank: only 15% of acquirers do not have branches within the state. Sales are more local in regions with more soft information. Second, a failed bank is more likely to be purchased by a bank that has a similar loan portfolio and that offers similar services, highlighting the role of failed banks' asset specificity. Third, low capitalization of potential acquirers decreases their ability to acquire a failed bank and potentially distorts failed bank allocation. The results are robust to restricting the data to actual bidders, confirming that they are not driven by auction eligibility criteria imposed by the FDIC. We relate these forces to FDIC losses from failed bank sales. We organize these facts using the fire sales framework of Shleifer and Vishny (1992). Our findings speak to recent policies that are predicated on the idea that a bank's ability to lend is embodied in its collection of assets and employees and cannot be easily replaced or sold.

Selling Failed Banks
Date Posted:Sun, 17 Aug 2014 10:35:55 -0500
We show that the allocation of failed banks in the Great Recession was likely distorted because potential acquirers of these banks were poorly capitalized. We illustrate this phenomenon within a model of auctions with budget constraints. In our model poor capitalization of some potential acquirers drives a wedge between their willingness to pay and the ability to pay for a failed bank. Using our framework, we infer three characteristics that drive potential acquirers? willingness to pay for a failed bank in the data: geographic proximity, bank specialization, and increased market concentration. Consistent with predictions of our model, we find that low capitalization of potential acquirers decreases their ability to acquire a failed bank. Finally, we show that the wedge between potential acquirers? willingness and ability to pay distorts the allocation of failed banks. The costs of this misallocation are substantial, as measured by the additional resolution costs of the FDIC. These findings have direct implications for the design of the bank resolution process.

REVISION: Selling Failed Banks
Date Posted:Sun, 17 Aug 2014 01:35:55 -0500
We study the recent episode of bank failures and provide simple facts to better understand who acquires failed banks and which forces drive the losses that the FDIC realizes from these sales. We document three distinct forces related to the allocation of failed banks to potential acquirers. First, a geographically proximate bank is significantly more likely to acquire a failed bank: only 15% of acquirers do not have branches within the same state as the failed bank. Sales are more local in regions with more soft information. Second, a failed bank is more likely to be purchased by a bank that has a similar loan portfolio and that offers similar services, highlighting the role of failed banks’ asset specificity. Third, low capitalization of potential acquirers decreases their ability to acquire a failed bank and potentially distorts failed bank allocation. The results are robust to restricting the data to actual bidders, confirming that they are not driven by auction eligibility ...

The Relation between Bank Resolutions and Information Environment: Evidence from the Auctions for Failed Banks
Date Posted:Thu, 28 Nov 2013 06:32:41 -0600
This study examines the impact of disclosure requirements on the resolution costs of failed banks. Consistent with the hypothesis that disclosure requirements mitigate information asymmetries in the auctions for failed banks, I find that, when failed banks are subject to more comprehensive disclosure requirements, regulators incur lower costs of closing a bank and retain a lower portion of the failed bank's assets, while bidders that are geographically more distant are more likely to participate in the bidding for the failed bank. The paper provides new insights into the relation between disclosure and the reorganization of a banking system when the regulators' preferred plan of action is to promote the acquisition of undercapitalized banks by healthy ones. The results suggest that disclosure regulation policy influences the cost of resolution of a bank and, as a result, could be an important factor in the definition of the optimal resolution strategy during a banking crisis event.

New: The Relation between Bank Resolutions and Information Environment: Evidence from the Auctions for Failed Banks
Date Posted:Wed, 27 Nov 2013 20:32:41 -0600
This study examines the impact of disclosure requirements on the resolution costs of failed banks. Consistent with the hypothesis that disclosure requirements mitigate information asymmetries in the auctions for failed banks, I find that, when failed banks are subject to more comprehensive disclosure requirements, regulators incur lower costs of closing a bank and retain a lower portion of the failed bank's assets, while bidders that are geographically more distant are more likely to participate in the bidding for the failed bank. The paper provides new insights into the relation between disclosure and the reorganization of a banking system when the regulators' preferred plan of action is to promote the acquisition of undercapitalized banks by healthy ones. The results suggest that disclosure regulation policy influences the cost of resolution of a bank and, as a result, could be an important factor in the definition of the optimal resolution strategy during a banking crisis event.

REVISION: Competition and Voluntary Disclosure: Evidence from Deregulation in the Banking Industry
Date Posted:Sat, 26 Oct 2013 10:52:34 -0500
We use the relaxation of interstate branching restrictions under the Interstate Banking and Branching Efficiency Act (IBBEA) to examine how increases in competition affect incumbents' voluntary disclosure choices. States implemented IBBEA over several years and to varying degrees, allowing us to identify the effect of increased competition on the voluntary disclosure decisions of both public and private banks. We find that increases in competition are associated with increases in the level of voluntary disclosure. Specifically, we find an overall increase in press releases and, in particular, an increase in those containing forward-looking, earnings-related, and capital structure-related disclosures. Consistent with incumbents increasing the disclosure of bad news to deter new entry, the tone of press releases becomes less positive and more negative after entry barriers are lowered.

REVISION: The Relation between Bank Resolutions and Information Environment: Evidence from the Auctions for Failed Banks
Date Posted:Thu, 17 Oct 2013 02:30:57 -0500
This study examines the impact of disclosure requirements on the resolution costs of failed banks. Consistent with the hypothesis that disclosure requirements mitigate information asymmetries in the auctions for failed banks, I find that when failed banks are subject to more comprehensive disclosure requirements, regulators incur lower costs of closing a bank and retain a lower portion of the failed bank’s assets, while bidders that are geographically more distant are more likely to participate in the bidding for the failed bank. The paper provides new insights on the relation between disclosure and the reorganization of a banking system when the regulators’ preferred plan of action is to promote the acquisition of undercapitalized banks by healthy ones. The results suggest that disclosure regulation policy influences the cost of resolution of a bank and, as a result, could be an important factor in the definition of the optimal resolution strategy during a banking crisis event.

REVISION: Entry Threats and Voluntary Disclosure
Date Posted:Thu, 16 Aug 2012 08:36:52 -0500
We exploit the relaxation of interstate bank branching restrictions in the 1990s to examine how the threat of new entrants affects incumbents' voluntary disclosure choices. The Interstate Banking and Branching Efficiency Act relaxed interstate banking and branching restrictions, thereby increasing competitive entry threats. The Act was implemented over several years and to varying degrees by different states, allowing us to identify the effect of changes in potential entry on the voluntary ...

Competition and Voluntary Disclosure: Evidence from Deregulation in the Banking Industry
Date Posted:Thu, 16 Aug 2012 00:00:00 -0500
We use the relaxation of interstate branching restrictions under the Interstate Banking and Branching Efficiency Act (IBBEA) to examine how increases in competition affect incumbents' voluntary disclosure choices. States implemented the IBBEA over several years and to varying degrees, allowing us to identify the effect of increased competition on the voluntary disclosure decisions of both public and private banks. We find that increases in competition are associated with an increase in press releases. Overall, press releases become more negative in tone as entry barriers decrease. However, disclosures by public banks and by banks issuing equity become incrementally positive in tone when entry barriers decrease. Thus, the increase in disclosure is consistent with a dominant incentive to deter entry via negative information, which is mitigated by an incentive to communicate positive information to investors.

The Relation between Bank Resolutions and Information Environment: Evidence from the Auctions for Failed Banks
Date Posted:Sat, 17 Dec 2011 11:31:06 -0600
This study examines the impact of disclosure requirements on the resolution costs of failed banks. Consistent with the hypothesis that disclosure requirements mitigate information asymmetries in the auctions for failed banks, I find that when failed banks are subject to more comprehensive disclosure requirements, regulators incur lower costs of closing a bank and retain a lower portion of the failed bank?s assets, while bidders that are geographically more distant are more likely to participate in the bidding for the failed bank. The paper provides new insights on the relation between disclosure and the reorganization of a banking system when the regulators? preferred plan of action is to promote the acquisition of undercapitalized banks by healthy ones. The results suggest that disclosure regulation policy influences the cost of resolution of a bank and, as a result, could be an important factor in the definition of the optimal resolution strategy during a banking crisis event.

REVISION: The Relation between Bank Resolutions and Information Environment: Evidence from the Auctions for Fa
Date Posted:Sat, 17 Dec 2011 04:27:29 -0600
This study examines the impact of disclosure requirements on the resolution costs of failed banks. Consistent with the existence of adverse selection in auctions for failed banks, regulators incur lower costs of closing a bank and retain a higher portion of the failed banks’ assets when the failed bank was subject to greater mandatory disclosure requirements. When failed banks have lower disclosure requirements, bidders are also more likely to be geographically closer to the failed bank. The ...