Market size structure refers to the distribution of shares of different size classes of local market participants, where the sizes are inclusive of assets both within and outside the local market. We apply this new measure of market structure in two empirical analyses of the US banking industry to address concerns regarding the effects of the consolidation in banking. Our quantity analysis of the likelihood that small businesses borrow from large versus small banks and our small business loan price analysis that includes market size structure as well as conventional measures yield very different findings from most of the literature on bank size and small business lending. Our results do not suggest a significant net advantage or disadvantage for large banks in small business lending overall, or in lending to informationally opaque small businesses in particular. We argue that the prior research that excluded market size structure may be misleading and offer some likely explanations of why our results differ.

This paper addresses a little examined intersection between the problem loan literature and the bank efficiency literature. We employ Granger-causality techniques to test four hypotheses regarding the relationships among loan quality, cost efficiency, and bank capital. The data suggest that problem loans precede reductions in measured cost efficiency; that measured cost efficiency precedes reductions in problem loans; and the reductions in capital at thinly capitalized banks precede increases in problem loans. Hence, cost efficiency may be an important indicator of future problem loans and problem banks. Our results are ambiguous concerning whether or not researchers should control for problem loans in efficiency estimation.

This introductory article examines the role of capital in financial institutions — why it is important, how market-generated capital ‘requiremenents’ differ from regulatory requirments and the form that regulatory requirements should take. Along the way, we examine historical trends in bank capital, problems in measuring capital, and some possible unintended consequences of capital requirements. Within this framework, we evaluate how the contributions to this special issue advance the literature and suggest topics for future research.

This paper offers a possible explanation for the conflicting results in the literature concerning the empirical relation between collateral and loan risk. We posit that differences in collateral characteristics, such as liquidity, may be associated with the empirical dominance of different risk-collateral relations implied by economic theory. Using credit registry data and a novel identification strategy to control for borrower and lender selection effects allows us to differentiate between the ex ante and ex post theories of collateral. We find that collateral overall is associated with lower risk premiums and higher default rates. The results indicate an important role for collateral in mitigating losses and reducing risk-taking incentives, consistent with ex post theories. Liquid collateral is associated with especially low risk premiums, and these loans perform better than those with illiquid collateral or no collateral. We also find that individual collateral types exhibit significant variation in terms of risk-collateral relations, with some consistent with ex ante theories and others with ex post theories. Our results suggest that the conflicting results in the literature may occur because different samples may be dominated by different types of collateral with different economic characteristics.

We investigate whether saving Wall Street through TARP really saved Main Street during the recent financial crisis. Our difference-in-difference analysis suggests that TARP statistically and economically significantly increased net job creation and net hiring establishments and decreased business and personal bankruptcies. The results are robust, including accounting for endogeneity. The main mechanisms driving the results appear to be increases in commercial real estate lending and off-balance-sheet real estate guarantees. These results suggest that saving Wall Street via TARP may have helped save Main Street, complementing the TARP literature and contributing to the cost–benefit debate.

We investigate whether the Troubled Assets Relief Program (TARP) gave recipients competitive advantages. Using a difference-in-difference (DID) approach, we find that: i) TARP recipients received competitive advantages and increased both their market shares and market power; ii) results may be driven primarily by the safety channel (TARP banks may be perceived as safer), which is partially offset by the cost-disadvantage channel (TARP funds may be relatively expensive); and iii) these competitive advantages are primarily or entirely due to TARP banks that repaid early. These results may help explain other findings in the literature, and yield important policy implications.

Conventional wisdom holds that small banks have comparative advantages vis-à-vis large banks in serving small firms, while recent literature suggests this may not be the case. Using a panel of recent US start-ups, we investigate how small bank presence affects these firms in normal times (2004–06) and in the recent financial crisis (2007–09). We find that greater small bank presence yields significantly more lending to and slightly lower failure rates of these firms during normal times. However, these benefits disappear during the financial crisis, possibly because small banks are less diversified and benefit less from government guarantees than large banks.

We address whether politics played important roles in allocating Paycheck Protection Program (PPP) bailout funds, and whether PPP allocations effectively bailed out small businesses vs. banks. Our econometric evidence suggests that politicians/other government agents at national and local levels effectively steered PPP funds toward small businesses and banks based on their locations to try to influence election outcomes. We also uncover evidence that some PPP funds were effectively allocated by lobbying efforts of certain banks. Findings are confirmed by a novel mediation analysis and numerous robustness checks. We also find banks profited from PPP through multiple channels, adding to extant findings, and suggesting that PPP may have effectively bailed out banks as well as small businesses, but through different political influences.