Knowledge that Transforms

Enhancing climate information disclosure quality in the banking sector improves transparency, reduces information asymmetry, and strengthens financial stability. We explore the effect of high-quality climate information disclosures, extracted from 271 U.S. banks’ annual reports from 2015 to 2024, on systemic risk. We use the deep learning model CLIMATEBERT to identify climate-related risk, neutral, and opportunity texts in U.S.-listed banks’ annual reports, focusing on their specificity. Based on these texts, and banks’ actual transition and physical risks, we construct a climate information disclosure quality index. This index includes non-symbolic and non-selective disclosures, measuring the transparency of banks’ climate disclosures. We find that improved climate disclosure quality reduces information asymmetry, mitigates market risk, and weakens systemic risk. Endogeneity tests and robustness checks support the findings. Increased investor attention amplifies the positive impact of climate disclosures. Finally, for financially unhealthy banks, the effect of enhanced disclosure quality is more significant.

This paper reports the results of an investigation of the impact of digital transformation on debt financing costs. By integrating information asymmetry theory and agency theory, we have developed a threefold risk-theoretic model to demonstrate how corporate digital transformation affects a firm’s debt financing costs. Drawing on a dataset of Chinese listed companies from 2007 to 2022, we measured digital transformation across three dimensions: attention, investment, and outcomes. The findings reveal that corporate digital transformation significantly reduces the cost of debt financing for companies. Mechanism tests indicate that digital transformation reduces debt financing costs by mitigating information risk, agency risk, and earnings risk through enhanced information disclosure quality, strengthened corporate governance, and improved expected earnings. Our paper not only enriches emerging research on the impact of corporate digital transformation on financial accounting but also provides theoretical insights for effectively alleviating the issue of expensive financing.

How susceptible to contagion are bank deposits associated with financial inclusion? To assess this susceptibility, we analyze the behavior of deposits around three significant events of bank failure in the Philippines. We conduct the event studies with the advantage of a unique dataset that disaggregates deposits by size at the town level. We show that both small and large deposits are withdrawn up to 4–5 quarters before the bank’s closure. We take advantage of this distinction between small and large deposits to test for contagion. Applying difference-in-difference regressions, we find evidence of contagion: the closure of a large bank leads to withdrawals at banks in neighboring towns by depositors both large and small. This is the case for two of the three events, and when the data is taken collectively. That there is a market for information affects deposit insurance as a safety net for depositors and as a disciplining tool for banks. There are also liquidity considerations that banks need to consider. In any case, we consistently find the behavior of small depositors to be no different from that of large depositors. Hence, if financial inclusion is about access to bank deposits, it is not likely to heighten systemic risks nor mitigate them.

Motivated by its rapid growth, this paper investigates how FinTech activities influence risk-taking by financial intermediaries (FIs). In this context, the paper revisits an ongoing debate on the impact of competition on financial stability: on one side, it is argued that greater competition encourages greater risk-taking (competition-fragility hypothesis), while the other side asserts that more competition can increase financial stability (competition-stability hypothesis). Using a curated database covering over 10,000 FIs and global FinTech activities, we find a robust relationship whereby greater FinTech presence is associated with heightened risk-taking by FIs, offering support for the competition-fragility hypothesis. However, the inclusion of bank-, industry, and country-specific characteristics can alter this relationship. Importantly, there is suggestive evidence indicating that in certain cases, greater FinTech presence may be associated with less FI risk-taking amid stronger domestic institutions. Notwithstanding the relevance for policy, this paper presents a novel framework that may help reconcile some of the conflicting results in the literature, which have found supportive evidence for each of the two competing hypotheses.

This study presents a methodology for analyzing procyclical systemic risk arising from joint monetary and prudential policy decisions. We analyze the impact of different scenarios of the monetary policy interest rate on the leverage ratio of US commercial banks. The Dynamic Conditional Correlation - Semi-nonparametric model and bivariate spectral analysis are applied to model the dynamics among the variables. The results indicate that high and low interest rates increase leverage while medium rates reduce it. The importance of considering asymmetries and heavy tails of probability distributions in stress tests and the dynamics of the correlation between variables is highlighted when assessing financial stability.

Using the staggered adoption of collateral law reforms across Europe, we examine their effects on trade credit financing. We find that firms in countries that adopt such reforms receive less trade credit, consistent with suppliers viewing these firms as less creditworthy. Moreover, this decrease in trade credit is more pronounced for firms and industries with more movable assets, for financially constrained firms, and for firms in countries with strong legal enforcement, indicating that collateralization of movable assets drives this relation. Our findings suggest that the use of movable assets as collateral in bank borrowing increases supplier risks and decreases demand for trade credit, thus discouraging its use.

Using China’s religion and household survey data, we find that a high degree of religiosity increases households’ willingness to borrow, both formally from financial institutions and informally from family and friends. A high degree of religiosity could facilitate formal household borrowing by fostering trust in transactions. However, the trust mechanism cannot explain the impact of religiosity on informal borrowing. We hypothesize that a strong religiosity might facilitate informal loans by promoting altruism, and we find supporting evidence. The effect of religiosity on informal loans is more pronounced in transactions where the parties involved are intrinsically less altruistic toward each other.

Ongoing financial innovation raises the specter of banking and payment crises. Little aggregate evidence exists on the repercussions of substantial suspensions of payments. State-level experiments fill this gap. Four times in the last forty years, U.S. governors suspended payments from state-insured depositories. Rhode Island’s deposits crisis (1991), which was large, prolonged, and occurred during a recession, substantially lengthened and deepened the downturn. Deposits freezes in Nebraska (1983), Ohio (1985), and Maryland (1985), which were short and occurred during expansions, had little macroeconomic impact. Data sparsity inhibits analysis of these events with standard methods. To perform inference, we develop a novel Bayesian method for synthetic control, which generates output useful for policymakers and theorists. Our findings suggest policies that ensure institutions continue to process payments on a business-as-usual basis at all times have substantial value.

We estimate the effect of the spring 2023 failures of Silicon Valley Bank and Signature Bank on the “connectedness” of US bank stock return volatilities using the forecast error variance decomposition framework of Diebold and Yilmaz (2012, 2014) and Lastrapes and Wiesen (2021). Using split-sample and time-varying VAR methods, we find that those failures significantly increased spillovers across a sample of surviving regional banks, but had only small and temporary effects on spillovers across systemically important too-big-to-fail banks. Our main findings imply that regulatory policy toward systemically important banks has been credible but that additional oversight of regional banks should be considered.

I use data on unsecured consumer loans from Lending Club to study how peer-to-peer lending markets respond to monetary policy shocks. I find that both loan supply and demand decrease following unexpected increases in the federal funds rate. The contraction in supply is smallest for risky borrowers, while the decline in demand is largest for these borrowers. In contrast, both demand and supply increase following surprise LSAP contractions, with the increases being largest for risky borrowers. These findings suggest that peer-to-peer lending dampens the effectiveness of monetary policy transmission in unsecured consumer credit markets while increasing risk-taking.