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.

Under the current paradigm in small business lending research, large banks tend to specialize in lending to relatively large, informationally transparent firms using “hard” information, while small banks have advantages in lending to smaller, less transparent firms using “soft” information. We go beyond this paradigm to analyze the comparative advantages of large and small banks in specific lending technologies. Our analysis begins with the identification of fixed-asset lending technologies used to make small business loans. Our results suggest that large banks do not have equal advantages in all of these hard lending technologies and these advantages are not all increasing monotonically in firm size, contrary to the predictions of the current paradigm. We also analyze lines of credit without fixed-asset collateral to focus on relationship lending. We confirm that small banks have a comparative advantage in relationship lending, but this appears to be strongest for lending to the largest firms.

We examine the effects of bank M&As on small business lending using data on over 6000 recent U.S. bank M&As. We are the first to decompose the impact of M&As into the static effects from simply melding the antecedent institutions and the dynamic effects associated with post-M&A refocusing of the consolidated institution. We are also the first to estimate the dynamic reactions of other local banks. We find that the static effects of consolidation reduce small business lending, but are mostly offset by the reactions of other banks, and in some cases also by refocusing efforts of the consolidating institutions themselves.

Bank bailouts are not “one-shot” events, as often portrayed, but rather dynamic processes with phases over time. Regulators “catch” financially distressed banks and provide aid, “restrict” these banks’ activities for ex ante unknown lengths of time, and then “release” the banks from the restrictions when capital ratios reach sufficiently healthy levels. This catch-restrict-release bailout approach is employed globally and applies to both major bailout methods capital injections (CIs) and debt guarantees (DGs). We model how a regulator that maximizes a social welfare function that includes the value of the bank and expected costs to the rest of the financial system and the real economy of its default might design and implement catch-restrict-release and test model predictions. Our data laboratory includes multiple EU nations over the financially stressful 2008-2014 period when many bailouts occurred. Findings suggest regulators bail out banks in a qualitatively consistent fashion with maximizing the social welfare function, yielding policy implications and directions for future research.

We investigate how banking market competition, informational opacity, and sensitivity to shocks have changed over the last three decades by examining the persistence of firm-level rents. We develop propagation mechanisms with testable implications to isolate the sources of persistence. Our analysis suggests that different processes underlie persistence at the high and low ends of the performance distribution. Our tests suggest that impediments to competition and informational opacity continue to be strong determinants of persistence; that the reduction in geographic regulatory restrictions had little effect on competitiveness; and that persistence remains sensitive to regional/macroeconomic shocks. The findings also suggest reasons for the recent record profitability of the industry.

We analyze how bank sentiment affects bank liquidity hoarding, distinguishing unexplained beliefs of bank managers from fundamental‐based beliefs. We build a bank management sentiment measure from textual analysis of 10‐Ks and utilize a comprehensive bank liquidity hoarding measure. We find that negative bank sentiment increases liquidity hoarding not warranted by a bank's fundamental conditions or external circumstances. Further analysis confirms that our findings reflect bank volition rather than being driven solely by borrowers or depositors. We address endogeneity concerns using exogenous weather conditions as instruments. Overall, our findings suggest that bank sentiment can influence how much liquidity banks provide to the economy and financial system.

Collateral is a widely used, but not well understood, debt contracting feature. Two broad strands of theoretical literature explain collateral as arising from the existence of either ex ante private information or ex post incentive problems between borrowers and lenders. However, the extant empirical literature has been unable to isolate each of these effects. This paper attempts to do so using a credit registry that is unique in that it allows the researcher to have access to some private information about borrower risk that is unobserved by the lender. The data also include public information about borrower risk, loan contract terms, and ex post performance for both secured and unsecured loans. The results suggest that the ex post theories of collateral are empirically dominant, although the ex ante theories are also valid for customers with short borrower–lender relations that are relatively unknown to the lender.

Despite surging environmental laws, how their enforcement influences banks' management of climate risks remains underexplored.Using the Brazilian Amazon as a laboratory, we examine the impact of a shock to environmental law enforcement capacity on bank management of risks arising from deforestation-a significant but understudied climate risk.After enforcement declined, Brazilian banks significantly altered their priorities to more short-term profitability over longerterm risk concerns.Banks greatly increased lending to agribusinesses engaged in deforestation and actively shifted resources to regions with higher deforestation potential.Results suggest that without rigorous enforcement, banks may fail to fully internalize deforestation risks, despite existing environmental laws.

We provide evidence on the validity of the it conglomeration hypothesis versus the strategic focus hypothesis for financial institutions using data on U.S. insurance companies. We distinguish between the hypotheses using profit scope economies, which measure the relative efficiency of joint versus specialized production, taking both costs and revenues into account. The results suggest that the conglomeration hypothesis dominates for some types of financial service providers and the strategic focus hypothesis dominates for other types. This may explain the empirical puzzle of why joint producers and specialists both appear to be competitively viable in the long run. Journal of Economic Literature Classification Numbers: G22, G28, G34, L23, L89.