This paper reviews the extant empirical studies of financial innovation. Adopting broad criteria, the authors found just two dozen studies, over half of which (fourteen) had been conducted since 2000. Since some financial innovations are examined by more than one study, only fourteen distinct phenomena have been covered. Especially striking is the fact that only two studies are directed at the hypotheses advanced in many broad descriptive articles concerning the environmental conditions (e.g., regulation, taxes, unstable macroeconomic conditions, and ripe technologies) spurring financial innovation. The authors offer some tentative conjectures as to why empirical studies of financial innovation are comparatively rare. Among their suggested culprits is an absence of accessible data. The authors urge financial regulators to undertake more surveys of financial innovation and to make the survey data more available to researchers.

We study the effects of structural changes in banking markets on the supply of credit to small businesses. Specifically, we examine whether bank mergers and acquisitions (M&As) and entry have “external” effects on small business loans by other banks in the same local markets. The results suggest modest positive external effects from these dynamic changes in competition, except that large banks may reduce small business lending in reaction to entry. We confirm bank size and age as important determinants of this lending, and show that the measured age effect does not appear to be driven by local market M&A activity.

This paper examines the wealth effects of financial-institution strategic alliances on the shareholders of the newly allied firms. Our paper is different from most previous studies, in that we focus on financial institutions, we employ Japanese data for the late 1990s, and we study whether different types of alliances result in differing magnitudes of stock market responses. We find that a strategic alliance, on average, increases the value of the partner firms. Second, the gains from the alliance are spread more widely among the partners than would be suggested by a random alternative. Third, smaller partners tend to experience larger percentage gains. Fourth, the market values inter-group alliance announcements more than intra-group alliance announcements. Fifth, we do not find a significant difference in the abnormal returns shown by domestic–foreign alliances and domestic–domestic alliances.

Recent widespread consolidation in the banking industry has elicited concern that lending to small businesses will be reduced by the banking industry. The consolidation, though, has stimulated an upsurge in new bank charters. This study compares the lending by de novo banks to small businesses with the lending by similarly sized incumbent banks for the years 1987–1994. We find that the portfolios of de novo banks consistently contain a substantially higher percentage of small business loans than do the portfolios of similar incumbents. These results indicate that de novo banks can be part of the solution to the problems that consolidation may create.

This paper investigates the pricing of insolvent banks in the U.S. that are sold under the purchase and assumption resolution method of the Federal Deposit Insurance Corporation (FDIC). We consider quarterly data for 444 acquisitions of insolvent U.S. banks between 2009 and 2016. We find that acquirers not only pay higher prices for insolvent banks with larger core deposits, as has been highlighted by the literature (and is consistent with the FDIC’s beliefs), but also for those banks with larger branch networks that are less dispersed geographically. When the acquirers bid (separately) for the assets of the insolvent banks, they place a positive value on the number of branches of the insolvent bank, but appear to be insensitive to geographic dispersion. Acquirers also pay more for banks with a national charter. The results additionally show that failed banks are most likely to be acquired by relatively large and highly capitalized banks whose organic growth is not affected in the years following the acquisition. Overall, our findings contribute to a better understanding of the implications of the purchase and assumption resolution method for the FDIC and for the banking industry.

This paper examines how bank loans evolve following unexpected deposit flows. Using bank-level U.S. commercial banks' data, we show that while large banks' lending is largely unaffected, loans at small banks significantly change after deposit shocks. Furthermore, the extent of this change among small banks depends on their exposure to off-balance-sheet liquidity risk, proxied by the level of unused commitments. Small banks with higher off-balance sheet exposures tend to extend fewer new loans following positive deposit shocks, suggesting that liquidity absorbed from the failure of other banks or market disruptions might not as easily be lent again to borrowers. Overall, these findings emphasize how off-balance-sheet risks can constrain the credit supply channel, even in the presence of liquidity surpluses.

This paper addresses the relationship between the aging process at new and relatively young banks and the tendency of banks to make loans to small businesses. Defining small business loans as C&I loans that are under $1 million in size, we analyze a sample of banks that had assets of less than $500 million in assets for the years 1993–1996 and that were 25 years of age or younger. We find, as have earlier studies, that banks' proclivities for small business lending are negatively related to their age and to their size. We proceed much farther, however, by introducing a number of additional explanatory variables, including the start-up year of the bank. We find that small business lending is negatively related to its being part of a MBHC. Also, small business lending is positively related to higher concentration rates in urban areas but is negatively related to higher concentration in rural areas. Despite the inclusion of these additional variables and a number of alternative specifications, the negative effects of a bank's age on its small business lending persist.