We consider a model in which the threat of bank liquidations by creditors as well as equity-based compensation incentives both discipline bankers, but with different consequences. Greater use of equity leads to lower ex-ante bank liquidity, whereas greater use of debt leads to a higher probability of inefficient bank liquidation. The bank's privately-optimal capital structure trades off these two costs. With uncertainty about aggregate risk, bank creditors learn from other banks’ liquidation decisions. Such inference can lead to contagious liquidations, some of which are inefficient; this is a negative externality that is ignored in privately-optimal bank capital structures. Thus, under plausible conditions, banks choose excessive leverage relative to the socially optimal level, providing a rationale for bank capital regulation. While a blanket regulatory forbearance policy can eliminate contagion, it also eliminates all market discipline. However, a regulator generating its own information about aggregate risk, rather than relying on market signals, can restore efficiency and market discipline by intervening selectively.

I develop a normative theory of political influence on bank lending and capital structure. Legislators want banks to make politically-favored loans that reduce bank profits but generate social or political benefits. The regulator uses asset-choice regulation and capital requirements to induce the lending desired by legislators. There are four main results. First, if regulators dislike bank fragility, then credit-allocation regulation should be accompanied by higher capital requirements. Second, banks will resist higher capital requirements, which will be lower when banks have more bargaining power. Third, when politics matters more in bank regulation, the banking sector is larger and more competitive, with higher capital requirements. Fourth, the optimal reporting mechanism, in which banks report their privately-known profitability and the regulator endogenously determines capital requirements and stringency of credit-allocation regulation in response, shows that political influence is stronger when banks are more profitable.

This paper is a review of the literature on fintech and its interaction with banking. Included in fintech are innovations in payment systems (including cryptocurrencies), credit markets (including P2P lending), and insurance, with Blockchain-assisted smart contracts playing a role. The paper provides a definition of fintech, examines some statistics and stylized facts, and then reviews the theoretical and empirical literature. The review is organized around four main research questions. The paper summarizes our knowledge on these questions and concludes with questions for future research.

This paper develops a theory of how risk is assessed and priced through the business cycle by developing an intuitive model in which there is uncertainty about whether outcomes depend on the risk-management skills of banks or are just based on luck, in the spirit of Piketty’s (1995) model of “left-wing” and “right-wing” dynasties. Periods of sustained banking profitability cause all agents to rationally elevate their estimates of bankers’ skills, despite the uncertainty about what is driving outcomes. Everybody consequently becomes sanguine about bank risk, credit spreads decline, and banks choose increasingly risky assets. Conditional on subsequently observing unexpectedly high defaults, beliefs can endogenously shift to put more weight on outcomes being luck-driven, and this causes credit spreads to widen and may be enough to trigger a crisis. Regulatory implications of the analysis are extracted.

This paper develops a theory of strategic information disclosure with disagreement. Managers of firms are voluntarily communicating subjective information, and prior beliefs about the strategy to maximize project value are rational but heterogeneous, potentially generating fundamental disagreement. Three main results are derived. First, not all firms disclose (subjective) information about strategy. Second, more valuable firms, and those whose strategies investors are more likely to agree with, disclose less information in equilibrium. Third, improved corporate governance leads to lower executive compensation and less information disclosure. An implication of the analysis for banks is that greater strategic information disclosure may increase the probability of bank runs—banks may choose to be opaque because transparency makes them fragile.