Our data show that nearly all firms borrow for the first time in their life from a single bank, but soon afterward some of them start borrowing from additional banks. Duration analysis shows that the likelihood of a firm substituting a single relationship with multiple relationships increases with the duration of that relationship. It also shows that this substitution is more likely to occur for firms with more growth opportunities and for firms with poor performance. The analysis of the ex post effects of the initiation of multiple relationships, in turn, shows that firms with higher levels of investment prior to the initiation of multiple relationships increase their investment even further when they start to borrow from multiple banks and that firms with poor prior performance continue to perform poorly afterward. These results suggest that concerns with hold-up costs, together with an unwillingness by the incumbent bank to increase its exposure to a firm because of its past poor performance, are the key reasons for these firms to initiate an additional relationship this early in their life. Journal of Economic Literature Classification Numbers: G21, G32.

The 2007–9 financial crisis began with increased uncertainty over funding conditions in money markets. We show that funding uncertainty can explain diverse elements of commercial banks’ behavior during the crisis, including: (i) reductions in lending volumes, balance sheets, and profitability; (ii) more intense competition for retail deposits (including deposits turning into a “loss leader”); (iii) stronger lending cuts by more highly extended banks with a smaller deposit base; (iv) weaker pass-through from changes in the central bank’s policy rate to market interest rates; and (v) a binding “zero lower bound” as well as a rationale for unconventional monetary policy.

Using a large, new database of contractual provisions governing the allocation of cash flow rights in venture capital (VC) financings, we investigate how contract design is related to VC abilities to monitor and provide value-added services to the entrepreneur. We find that more experienced VCs, who have superior abilities and more frequently join the boards of their portfolio companies, obtain weaker downside-protecting contractual cash flow rights than less experienced VCs. Several pieces of evidence suggest that this relation is unlikely to be driven by selection effects. The results suggest that VCs with better governance abilities focus less on obtaining downside protections, which entail risk-sharing costs, and more on other aspects of the contract (such as obtaining board representation) during negotiations with entrepreneurs. The results also imply that previous estimates of the amount entrepreneurs pay for affiliation with high-quality VCs are overstated.

A number of developing countries have adopted deficit finance regimes involving multiple- (currency and bond) reserve requirements. A key characteristic of these regimes is that the real interest rates on reservable bonds are higher than the real return rates on currency, so that the nominal interest rates on the bonds are positive. We seek an efficiency-based explanation for the existence of multiple-reserve regimes and for this key characteristic. We find that there are economies in which some of the efficient allocations can be supported only by multiple-reserve requirements, and that positive nominal bond rates may be needed to support some of these allocations. We also find that there are economies in which allocations supported by multiple-reserve regimes with negative nominal bond rates Pareto dominate single-reserve allocations, even when the latter are efficient relative to other single-reserve allocations. Journal of Economic Literature Classification Numbers: E42, E58, H62.

This paper addresses the First Theorem of Welfare Economics in a moral hazard environment. An entrepreneur sells equity in a firm which he supplies with an unobservable, costly input. How much equity he retains determines his incentives and is observed by investors. The investors have rational expectaions which cause the equity price to increase in the amount of equity the entrepreneur retains. This gives the entrepreneur an incentive to retain equity and hence supply input. The entrepreneur may also be bound by an explicit incentive contract. In this framework, not all competitive equilibria are efficient, as defined relative to the moral hazard constraint. However, equilibria can be inefficient only if the entrepreneur's optimal input is nonunique or exhibits positive income effects.

We analyze the potential competitive effects of the proposed Basel II capital regulations on US bank credit card lending. We find that bank issuers operating under Basel II will face higher regulatory capital minimums than Basel I banks, with differences due to the way the two regulations treat reserves and gain-on-sale of securitized assets. During periods of normal economic conditions, this is not likely to have a competitive effect; however, during periods of substantial stress in credit card portfolios, Basel II banks could face a significant competitive disadvantage relative to Basel I banks and nonbank issuers.

This paper investigates whether the institutional affiliation of a collateralized loan obligation (CLO) manager influences the manager's access to information and risk appetite. We find that CLO managers affiliated with banks start to sell off their positions in loans arranged by their bank well before the onset of default. In contrast, CLO managers affiliated with nonbanks do not lower their exposures to distressed loans. These findings are consistent with bank-affiliated CLO managers being more risk averse, but they could also derive from them having access to valuable information. On close inspection, we find that although bank-affiliated CLO managers are averse to holding any distressed loans, they are also more aggressive at divesting distressed loans arranged by their parent bank, suggesting that they benefit from an information wedge. Besides helping us understand CLO managers’ trading activities, our findings highlight a potential limit to banks’ ability to originate loans and distribute them via their affiliated CLOs.

Financial intermediation has distinct value from transforming financial claims to create liquidity and mitigate risks. However, research and policy competition analyses often neglect this value or minimally account for it. We review findings to better incorporate this value. We suggest shifting the mix of individual services analyzed to better represent the distinct value, focusing more on topics closely aligned with the distinct value concept beyond individual services, and accounting for the multimarket nature of financial intermediation. We recommend attention on future competition with digital FinTech, BigTech, and DeFi firms and policies to best preserve the distinct value of financial intermediation.

We survey more than 200 private equity (PE) managers from firms with $1.9 trillion of assets under management (AUM) about their portfolio performance, decision-making and activities during the Covid-19 pandemic. Given that PE managers have significant incentives to maximize value, their actions during the pandemic should indicate what they perceive as being important for both the preservation and creation of value. PE managers believe that 40% of their portfolio companies are moderately negatively affected and 10% are very negatively affected by the pandemic. The private equity managers—both investment and operating partners—are actively engaged in the operations, governance, and financing in all of their current portfolio companies. These activities are more intensively pursued in those companies that have been more severely affected by the Covid-19 pandemic. As a result of the pandemic, they expect the performance of their existing funds to decline. They are more pessimistic about that decline than the venture capitalists (VCs) surveyed in Gompers et al. (2021). Despite the pandemic, private equity managers are seeking new investments. Rather than focusing on cost cutting, PE investors place a much greater weight on revenue growth for value creation. Relative to the 2012 survey results reported in Gompers, Kaplan, and Mukharlyamov (2016), they appear to give a larger equity stake to management teams and target somewhat lower returns.