Bank reliance on short-term funding has increased over time. While an effective source of financing in good times, the 2007 financial crisis has exposed the vulnerability of banks and ultimately firms to such a liability structure. We show that banks dependent on wholesale funding contracted their lending the greatest during the crisis. Our results suggest, however, that in the financial crisis vulnerable banks passed the liquidity shock only to public firms and not to private firms. Loans to private firms were affected through a different channel, largely through higher retained shares by lead arrangers. Consistent with standard models of financial intermediation with information asymmetry, vulnerable banks increased their monitoring of informationally opaque firms for which the potential for informational rents is the highest.

We explore how traders’ equity capitalization influences asset prices in a framework that accounts for market power. In our model, traders with capital constraints engage in transactions in an imperfectly competitive market. We demonstrate that looser capital constraints elevate both asset prices and price impact, the latter diminishing market liquidity. Using Canadian Treasury auction data, we illustrate how to apply our model to quantify these effects. We estimate the shadow costs of capital constraints by leveraging a temporary policy exemption during 2020–2021. We show that while these constraints are only infrequently binding, their relative impact when activated can be sizable. (JEL E63, G12, G14, G23, G41, L13)

Abstract The FDIC resolves insolvent banks with scoring auctions. Although the structure of the scoring rule is known to bidders, they are uncertain about how the FDIC trades off different bid components. Scoring-rule uncertainty motivates bidders to submit multiple bids for the same failed bank. To evaluate the effects of uncertainty and multiple bidding for FDIC costs, we develop a methodology for analysing multidimensional bidding when the auctioneer’s scoring weights are unknown to bidders. We estimate private valuations for failed-bank assets during the great financial crisis and compute counterfactuals in the absence of scoring uncertainty. Our findings imply a substantial reduction in FDIC resolution costs of between 29.8% ($8.2 billion) and 44.6% ($12.3 billion). These savings can reduce policy-driven banking-sector distortions, since FDIC resolution costs are covered either through special levies on banks or through loans from the US Treasury. Our analyses also shed new light on optimal bid portfolio choice in combinatorial auctions.

In traditional over-the-counter markets, investors trade bilaterally through intermediaries. We assess whether and how to shift trades on a centralized platform with trade-level data on the Canadian government bond market. We document that intermediaries charge a markup when trading with investors and specify a model to quantify price and welfare effects from market centralization. We find that many investors would not use the platform, even if they could, because it is costly, competition for investors is low, and investors value relationships with intermediaries. Market centralization can even decrease welfare, unless competition is sufficiently strong.