Knowledge that Transforms

Using earnings conference calls, we investigate banks’ views of the Troubled Asset Relief Program (TARP) to understand why TARP generated so few loans. We find that banks generally regarded TARP favorably and many mentioned using TARP funds to make loans. However, actual loan growth fell well below expectations based on prior capital ratios, even among banks that publicly committed to lending. Other banks highlighted that the funds would improve their capital ratios. We show that these perspectives are largely unrelated to banks’ ex-ante financial characteristics, but instead reflect the evolving conditions during the crisis period. These shifts are consistent with a large decline in the fraction of banks that commented on the favorable pricing of the preferred stock over time. Our findings suggest that banks primarily used TARP funds to strengthen capital ratios, partly driven by CEO career concerns. Weak loan demand and evolving market conditions also contributed to the sluggish loan growth following the TARP injections.

We construct a novel panel of insider ownership for roughly 600 U.S. bank holding companies from 2003 to 2014 to test whether ownership structure shaped recapitalizations around the Global Financial Crisis (GFC). Insider ownership shows no discrete shift around the GFC. Using a difference-in-differences design with BHC and time fixed effects, we find that, after Q3 2008, banks with higher pre-crisis insider stakes issued significantly less common equity than otherwise similar peers. This effect is more pronounced where insiders enjoy greater private benefits of control, as proxied by insider lending and earnings opacity—consistent with dilution reluctance as the mechanism. The findings hold in propensity score matched regressions and when employing instrumental variables for insider ownership. These results reveal that ownership structure affects banks’ equity issuances in crises, underscoring the importance of accounting for ownership structure in bank stress tests and capital-regulation frameworks.

• How does product market competition affect corporate environmental footprint? • We examine restructuring of U.S. electric utilities, the number one emissions-intensive sector. • Cost-cutting actions are the key driver of changes in operations and emissions of electric plants. • Cost-cutting actions lower environmental footprint when plant technology allows greener production. • Without such technology, competition worsens environmental outcomes. Banks face pressure to integrate a wider range of risks into lending decisions, including both traditional product-market risks and the increasingly important environmental risk. Yet how these two types of risk interact remains unclear. We show that production technology is pivotal in shaping the impact of product-market competition on environmental risk. Focusing on the restructuring of the US electric utility industry, which introduced product-market competition into a highly polluting sector, we find that technological capacity is key. When technology enables cost-saving production decisions that also improve environmental performance, competition reduces environmental footprint. Otherwise, it exacerbates it. These findings suggest that lenders must assess not only individual risk factors of borrowers but also their potential interactions, with firms’ technological capacity playing a crucial role.

We examine how banks manage carbon transition risk by selling loans given to polluting borrowers to less regulated shadow banks in securitization markets. Exploiting the election of Donald Trump as an exogenous shock that reduces carbon transition risk, we find that banks engage in regulatory arbitrage and use brown loan securitization to manage their exposure to carbon transition risk. Banks are more likely to securitize brown loans when carbon transition risk is high but keep these loans on their balance sheets when the risk is reduced. In addition, securitization enables banks to offer lower interest rates to polluting borrowers but does not affect the supply of green loans. Our findings are more pronounced among banks with low levels of capitalization, domestic banks, and banks that do not display green lending preferences. We discuss how securitization can weaken the effectiveness of bank climate policies.

Search; Bargaining; Markets; Adverse selection;

Small business entrepreneurs facing credit constraints may experience significantly different future income trajectories compared to their unconstrained counterparts. We quantify this difference using uniquely detailed loan application data and a regression discontinuity design based on a bank’s credit score cutoff rule employed in the loan approval process. Our findings indicate that loan acceptance increases recipients’ real income by 11% five years later compared to rejected applicants. This effect persists across a wide range of robustness tests and is primarily driven by the utilization of borrowed funds for profitable investments, as captured by the bank’s ex-ante soft information and the ex-post firm performance. Additionally, within the cohort of accepted applicants, future income is higher for those who were easily accepted compared to marginally accepted borrowers with similar creditworthiness, highlighting the important efficiency effects of loan usage.

What is the impact of a sudden and sizeable increase in bank capital requirements on the lending activity by directly affected banks and by non-affected non-bank financial institutions (NBFIs)? To answer this question, we apply a difference-in-differences methodology around the capital exercise by the European Banking Authority (EBA) in 2011 with German credit register data. We find that insurance companies, financial enterprises, and factoring companies — but not leasing companies or very large NBFIs — and Non-EBA banks expand their corporate lending relative to EBA banks. In particular, NBFIs use the opportunity to expand their credit activities, in riskier and more competitive borrower segments.

Bank adoption of external application programming interfaces (APIs) enables bank customers to share their data more efficiently and securely with other third-party financial institutions and FinTechs, thus enabling open banking and bank data portability. Analyzing determinants of API adoption by U.S. banks from 2007 to 2022, we show that banks that adopt APIs tend to be larger and face lower competitive pressures. The announcement of President Biden’s executive order in July 2021 encouraged increased bank data portability and led to an acceleration in bank API adoption. Banks that adopt APIs experience an increase in Return on Assets ( ROA ) and Tobin’s Q and a decrease in loan loss provisions, particularly after President Biden’s executive order. We find that APIs’ ability to facilitate data access and sharing improves bank information flows and supports banks’ loan and deposit services which form the foundation of notable improvements in bank performance. Overall, our results on the determinants and implications of API adoption have important policy implications for the discussion on open banking regulation and bank data portability.

Using the case of the pogroms that took place in the historical region of the 'Pale of Settlement' in Eastern Europe, this paper analyzes the cultural legacy of ethnic violence and its long-term economic impact on access to finance and on corporate innovation. We find that firms in regions with a higher historical intensity of ethnic persecution face greater financial constraints, relying more on internal finance and experiencing reduced access to external finance. These financial limitations are linked to sluggish innovation activities among present-day firms. We propose that a mechanism of financial antipathy, rooted in a persistent anti-market culture fostered by historical ethnic animosity, explains these effects and reflects a long-term degradation of local social capital. Our results are supported by causal evidence using instrumental variables based on the precursors of historical inter-ethnic violence. The animosity and discrimination against the minority group appear to transfer to the broader economic activities in which that group was involved, creating lasting economic consequences for the majority population – consequences that continue to affect financial development and innovation to the present day.