Knowledge that Transforms

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.

We provide novel evidence on the loan market benefits of high IPO underpricing. We show that greater underpricing is associated with a significantly larger within-firm reduction of post-IPO borrowing costs. This benefit of underpricing is less pronounced for firms with high ex-ante information asymmetry and is concentrated in firms with a high demand for advertisements. In addition, neither price revision before the IPO nor the short-term or long-term stock return after the IPO has a similar effect. Our results suggest that underpricing affects borrowing costs through an attention channel and highlight a real economic effect of underpricing from the loan market.

This paper estimates the elasticity of minority credit supply to deposit shares of Minority Depository Institutions (MDIs). I use within-county tract-level variation in exposure to the Community Reinvestment Act and show that if a census tract loses MDI presence following a merger between an MDI bank and a community bank, its minority mortgage credit declines by 40%. These effects are driven by the loss of operationally efficient MDIs, and about half of the overall impact is attributable to the loss of mission alone. A 1% increase in county market shares of such tracts leads to roughly a 3% decrease in county-level minority homeownership.

This paper investigates the impact of the first system-wide capital relief package adopted by euro area prudential authorities, to support bank lending to firms at the outbreak of the COVID-19 pandemic. By leveraging confidential supervisory and credit register data, we uncover two main findings. First, capital relief measures support banks’ capacity to supply credit to firms. Second, the type of relief matters. Banks increase their credit supply in response to measures that reduce binding capital requirements and affect banks’ ability to distribute dividends. By contrast, discretionary relief measures that do not affect dividend policy are met with limited success. Moreover, requirement releases are more effective for banks with ex-ante lower capital headroom and for lending to smaller firms. These findings provide novel insights on the design of effective bank capital requirement releases in crisis times and, more generally, of policies to support bank credit in times of economic distress.

Decentralised finance (DeFi) lending protocols have experienced significant growth recently, yet the motivations driving investors remain largely unexplored. We use granular, transaction-level data from Aave, a leading player in the DeFi lending market, to study these motivations. Our theoretical and empirical findings reveal that the search for yield predominantly drives liquidity provision in DeFi lending pools, whereas borrowing activity is mainly influenced by speculative and, to some extent, governance motives. Both retail and large investors seek potential high returns through market movements and price speculation, however the latter engage in DeFi borrowing relatively more than the former also to influence protocol decisions and accrue more significant governance rights.

This paper shows that anticipation can meaningfully impact inferences about the effects of covenant violations. Using textual analysis of SEC filings and earnings call transcripts, I construct a measure of covenant concerns that identifies instances where firms disclose forward-looking risks related to their debt covenants. On average, nearly 30 percent of U.S. non-financial firms report covenant concerns each year. While the real effects of covenant violations are robust for most outcomes, the estimated impact of some variables, including cash acquisitions, default risk, and credit line availability, can be overstated. This finding highlights the importance of selection around violation: firms that anticipate and successfully avoid violations differ systematically from firms that fail to avoid them.