Knowledge that Transforms

This study examines how bank risk influences employee wage compensation, disentangling the effects of risk exposure and leverage. Using data from U.S. commercial banks (1990–2022), we find that higher bank risk—measured by earnings volatility, default probability, and credit risk—is associated with higher wages, alongside wage effects linked to monitoring incentives from greater capitalization. This relationship is most pronounced in smaller, less-capitalized banks, under favorable economic conditions, and when bank concentration is low—contexts where employees have greater bargaining power. Overall, bank wages reflect both compensation for job insecurity and monitoring-related incentives, offering insight into employee pay as a signal of bank fragility.

We study the cost of funding channel by investigating how an easing in firms’ external financing cost affects corporate investment. This paper employs ECB’s corporate security purchase program as a quasi-natural experiment that reduces firms’ bond funding costs. Using balance sheet information on non-financial firms in France, we find that firms increase maintenance investment to preserve existing assets, instead of investing in new equipment to grow in scale. Our findings suggest that firms face non-convex costs in adjusting their capital stock and do not smoothly adjust investment following a shock in the cost of capital.