This article uses the 2007–09 financial crisis as a negative liquidity shock on banks in the USA and analyzes its transmission to the real economy. The ex ante heterogeneity in the amount of long-term debt that matured during the crisis is used to measure the variation in banks’ exposure to the liquidity shock. I find that banks transmitted the liquidity shock to the real economy by reducing their loan supply. The reduction was particularly strong for real estate loans. As a result, house prices declined in the MSAs where these banks have branches. Bank capital plays a significant role in the transmission: under-capitalized banks transmitted the liquidity shock, whereas well-capitalized banks’ lending did not show any decline

Recent literature suggests that higher capital requirements for banks might lead to a socially costly crowding out of deposits by equity. This paper shows that additional equity in banks can help to crowd in deposits. Intuitively, as banks have more equity and become safer, the cost of deposit funding may decline; this, in turn, can encourage banks to expand their deposits. However, I also find that, for this effect to occur, capital requirements may have to be stringent enough: When bank capital is low, a small rise in capital requirements can cause banks to substitute equity for deposits. Overall, a non-monotonic relationship between the required amount of equity in banks and their level of deposit funding obtains

We develop a model where banks invest in reserves and loans, and trade loans on the interbank market to deal with liquidity shocks. Two types of equilibria emerge, depending on the degree of credit market competition and the level of aggregate liquidity risk. In one equilibrium, all banks keep enough reserves and remain solvent. In the other, some banks default with positive probability. The latter equilibrium exists when competition is weak and large liquidity shocks are unlikely. The model delivers several implications concerning the relationship between competition, aggregate credit, and welfare

We study political influences on private banks receiving government funds. Using spatial discontinuities associated with congressional district borders, we show that recipient banks of the 2008 Troubled Asset Relief Program (TARP) program increased mortgage and small business lending by 23–60% more in census tracts located just inside their home-representative’s district than just outside; the effect also shows up in higher loan acceptance rates, and mortgages more likely to be impaired or in default. The effect is stronger when the representative voted for TARP, is politically powerful, connected to the financial industry, and when the bank is important in the district. These findings suggest that obtaining public funds subjects firms to political influences, which affects the quantity and quality of corporate investment because of political considerations

The successful bail-in of creditors in African Bank, a small South African monoline lender, provides an opportunity to evaluate the intended and unintended consequences of new resolution tools. Using a dataset that matches quarterly, daily, and financial-instrument level data, I show that the bail-in led to money-market funds “breaking the buck”, triggering significant redemptions and some financial contagion. To limit potential systemic effects, the authorities used complementary interventions, including imposing discretionary liquidity restrictions on mutual funds and market-making facilities for affected financial instruments. This supported a sustainable restructuring of the bank and reduced financial spillovers. The lesson is that future interventions using these new resolution tools should take into account the potential unintended systemic implications, particularly in smaller jurisdictions where there is a high degree of interconnectedness between bank and nonbank financial institutions