Retail banking is a complex industry in which depository institutions bundle various services and may have market power. We use a recent regulation as a natural experiment to provide broad evidence about competition and the importance of bundling in retail banking. That regulation, which resulted from the Durbin Amendment to the Dodd–Frank Act, capped debit card interchange fees for banks with over 10 billion in assets. Using a difference-in-differences identification strategy, we document and quantify the resulting decline in interchange income for treated banks. We further find that treated banks offset more than 90% of the lost interchange income through increases in deposit fees for account holders. We argue that the ability to adjust deposit fees indicates (i) that treated banks have market power with respect to their account holders and (ii) strong complementarity between debit card transactions and deposit accounts. These results are robust when limiting the sample to banks near the asset threshold or using control banks with low direct competition with treated banks. Treated banks neither reduced costs nor strategically avoided the 10 billion threshold.

The paper demonstrates that a real options structural model of borrower-creditor debt re-negotiations can help explain the cross-sectional variability of losses on defaulted debt securities. The explanatory power of this approach can be improved even further via a system of equations that incorporates additional information by jointly estimating the market values of debt and equity. Empirical tests with a large number of corporate defaults confirm the usefulness of this method. Moreover, higher volatility and lower discount rates around business cycle turning points can result in stakeholders waiting relatively longer for additional returns from defaulted debt. Such optimal stopping behavior based on a real options model mitigates the reduction in face value of debt but can prolong the duration of financial distress.

We test the market timing theory of capital structure using an earnings-based valuation model that allows us to separate equity mispricing from growth options and time-varying adverse selection; thus avoiding the multiple interpretations of book-to-market ratio. We find that equity market mispricing plays a significant, if not dominant, role in the security choice decision. Our results are robust to the inclusion of proxies for time-varying growth options and alternate methods of measuring misvaluation.

This paper examines the impact of reducing the tick size on market-making behavior on The Toronto Stock Exchange. The results indicate a significant decrease in the percentage of trades of fewer than 10,000 shares involving the upstairs traders and a significant increase in the percentage of trades of fewer than 1,000 share involving the designated market makers. Consistent with this finding, the upstairs traders earn significantly lower returns on non-block trades and the designated market markers earn lower returns on trades smaller than 1,000 shares. We conclude the tick size reduction benefits the trading public.Journal of Economic LiteratureClassification Numbers, G20, G24.

The Dodd–Frank Act created differential regulatory requirements for banks above specified asset size thresholds. Event study results imply greater expected net regulatory costs for above-threshold banks. Consistent with hypotheses that near-below-threshold banks alter their behavior to attempt to avoid or delay the regulatory costs and/or to ensure growth that they do experience is highly beneficial, we find that near-below-threshold banks grow assets, risk-weighted assets, and total loans more slowly, and charge higher rates on commercial loans. The results suggest that the Dodd–Frank Act created costs that near-below-threshold banks attempt to avoid by altering their behaviors in economically important ways.

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.

We study the effects of regulatory interventions and capital support (bailouts) on banks’ liquidity creation. We rely on instrumental variables to deal with possible endogeneity concerns. Our key findings, which are based on a unique supervisory German dataset, are that regulatory interventions robustly trigger decreases in liquidity creation, while capital support does not affect liquidity creation. Additional results include the effects of these actions on different components of liquidity creation, lending, and risk taking. Our findings provide new and important insights into the debates about the design of regulatory interventions and bailouts.

We examine the real effects of changes in bank mortgage loan underwriting standards by combining responses to the Federal Reserve’s Senior Loan Officer Opinion Survey, application information from the Home Mortgage Disclosure Act, and local housing market measures over 1990 to 2013. Tightened standards are associated with a 1 percentage point increase in denial rates and a 5% fall in loan issuance, controlling for applicant pool changes, but no change for predominantly-securitizing banks. In areas with more exposure to banks that have tightened standards, mortgage delinquency rates, house prices, new home sales, and residential construction employment fall substantially.

Opacity fosters price contagion that exacerbates the speculative cycles of bubbles and crashes that create financial instability. We find that banks with larger investments in opaque assets benefitted more from intra-industry revaluations associated with announcements of mergers in the period 2000–2006. The findings are robust to controls for competitive effects, spillover effects from higher likelihood of takeover, changes in real estate prices, and interest rates. Non-merger banks that gained most from merger activities also experienced the largest price declines during the subsequent 2007–2008 financial crisis.

We challenge the existing relationship lending literature on how banks manage their relationships with corporate borrowers during crises. We test theories of intertemporal smoothing during the closure period of the COVID-19 crisis when borrowers are in great need of relationship benefits. We find that relationship borrowers receive worse rather than more favorable loan contract terms than others during this period. These and other results provide novel evidence on the functioning of relationship lending during a pandemic and contrast existing evidence gleaned from banking and financial crises.