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Discussion Paper
New Report Assesses Structural Changes in Global Banking
The Committee on the Global Financial System, made up of senior officials from central banks around the world and chaired by New York Fed President William Dudley, recently released a report on ?Structural Changes in Banking after the Crisis.? The report includes findings from a wide-ranging study documenting the significant structural adjustments in banking systems around the world in response to regulatory, technological, and market changes after the crisis, while also assessing their implications for financial stability, credit provision, and capital markets activity. It includes a new ...
Report
Resolving “Too Big to Fail”
Using a synthetic control research design, we find that ?living will? regulation increases a bank?s annual cost of capital by 22 basis points, or 10 percent of total funding costs. This effect is stronger in banks that were measured as systemically important before the regulation?s announcement. We interpret our findings as a reduction in ?too big to fail? subsidies. The size of this effect is large: a back-of-the-envelope calculation implies a subsidy reduction of $42 billion annually. The impact on equity costs drives the main effect. The impact on deposit costs is statistically ...
Discussion Paper
A Principle for Forward-Looking Monitoring of Financial Intermediation: Follow the Banks!
In the previous posts in this series on the evolution of banks and financial intermediaries, my colleagues and I considered the extent to which banks still play a central role in financial intermediation, given the rise of the shadow banking system. There’s no arguing that financial intermediation has grown in complexity. And there’s also little doubt that the balance sheet of banks is not as representative of financial intermediation activity, and the associated risks, as it once was. Yet as we’ve argued, regulated bank entities have remained very much involved in virtually every ...
Discussion Paper
Selection in Banking
Over the past thirty years, more than 2,900 U.S. banks have transformed from pure depository institutions into conglomerates involved in a broad range of business activities. What type of banks choose to become conglomerate organizations? In this post, we document that, from 1986 to 2018, such institutions had, on average, a higher return on equity in the three years prior to their decision to expand, as well as a lower level of risk overall. However, this superior pre-expansion performance diminishes over time, and all but disappears by the end of the 1990s.
Discussion Paper
Quantifying Potential Spillovers from Runs on High-Yield Funds
On December 9, 2015, Third Avenue Focused Credit Fund (FCF) announced a “Plan of Liquidation,” effectively halting investor redemptions. This announcement followed a period of poor performance and large outflows. Assets at the fund had declined from a peak of $2.5 billion in May of 2015 to $942 million in November. Investors had redeemed more than $1.1 billion in shares since April 2015, and the fund’s year-to-date performance as of November had fallen below -21 percent. The FCF “run” highlights the need to quantify the potential for systemic risk among open-end mutual funds and the ...
Report
Credit market competition and the nature of firms
Empirical studies show that competition in the credit markets has important effects on the entry and growth of firms in nonfinancial industries. This paper explores the hypothesis that the availability of credit at the time of a firm's founding has a profound effect on that firm's nature. I conjecture that in times when financial capital is difficult to obtain, firms will need to be built as relatively solid organizations. However, in an environment of easily available financial capital, firms can be constituted with an intrinsically weaker structure. To test this conjecture, I use ...
Discussion Paper
The Nonbank Shadow of Banks
Financial and technological innovation and changes in the macroeconomic environment have led to the growth of nonbank financial institutions (NBFIs), and to the possible displacement of banks in the provision of traditional financial intermediation services (deposit taking, loan making, and facilitation of payments). In this post, we look at the joint evolution of banks—referred to as depository institutions from here on—and nonbanks inside the organizational structure of bank holding companies (BHCs). Using a unique database of the organizational structure of all BHCs ever in existence ...
Discussion Paper
Introducing a Series on the Evolution of Banks and Financial Intermediation
It used to be simple: Asked how to describe financial intermediation, you would just mention the word “bank.” Then things got complicated. As a result of innovation and legal and regulatory changes, financial intermediation has evolved in a way that invites us to question whether it revolves around banks anymore. The centerpiece of modern intermediation is the advent and growth of asset securitization: loans do not need to reside on the originator’s balance sheet until maturity any longer, but they can instead be packaged into securities and sold to investors. With securitization, ...
Working Paper
Life-cycle dynamics in industrial sectors. The role of banking market structure
This paper analyzes the role of bank competition on the life-cycle dynamics of non-financial industries. Using multi-dimensional data sets, which contain information on job creation and destruction for establishments in U.S. manufacturing sectors operating in different geographical regions and over time, I find evidence that bank competition accelerates the expansion of start-ups and helps them to thrive while young. Once these establishments are mature, however, less competitive banking markets are more propitious. Specifically, mature establishments expand at higher rates and exit the ...