[This article studies an asymmetric information game with "type convergence," in which, under some realizations of a common uncertainty, inducing informed agents to reveal their types through self-selection by contract choice is either costly or impossible. Under other realizations, self-selection permits costless distinctions between informed agents. I obtain sufficient conditions under which contracting with options prior to the realization of the common uncertainty leads to the existence of a perfectly separating, costless Nash equilibrium. Applications to variable rate loan commitments and life insurance contracting are discussed.]

Capital requirements linked solely to credit risk are shown to increase equilibrium credit rationing and lower aggregate lending. The model predicts that the bank's decision to lend will cause an abnormal run-up in the borrower's stock price and that this reaction will be greater the more capital-constrained the bank. The author provides empirical support for this prediction. The model explains the recent inability of the Federal Reserve to stimulate bank lending by increasing the money supply. He shows that increasing the money supply can either raise or lower lending when capital requirements are linked only to credit risk.

[We develop a dynamic model of bank capital structure in an acquisitions context which predicts: (i) total bank value and the bank's equity capital are positively correlated in the cross-section, and (ii) the various components of bank value are also positively cross-sectionally related to bank capital. Our empirical tests provide strong support for these predictions. The results are robust to a variety of alternative explanations—growth prospects, desire to acquire toe-hold positions, desire of capital-starved acquirers to buy capital-rich targets, market timing, pecking order, the effect of banks with binding capital requirements, Too Big To Fail, target profitability, risk, and mechanical effects.]

Abstract I present a theory of organizational higher purpose in which, in addition to profits, the firms’ owners and employees care about a purpose that guides decisions but transcends business goals. This purpose sacrifices profits but serves a greater good that generates positive utility for the owners and employees. Some purpose-driven firms insure employees against layoffs and may pay employees more or less than firms not offering such insurance. Whether purpose-driven firms offering layoff insurance pay employees more or less than purpose-driven firms not offering this insurance depends on the owner’s purpose-linked utility relative to the employee’s. (JEL D01, D21, D24, G03, G32)

This review of the literature on the 2007-2009 crisis discusses the precrisis conditions, the crisis triggers, the crisis events, the real effects, and the policy responses to the crisis. The precrisis conditions contributed to the housing price bubble and the subsequent price decline that led to a counterparty-risk crisis in which liquidity shrank due to insolvency concerns. The policy responses were influenced both by the initial belief that it was a market-wide liquidity crunch and the subsequent learning that insolvency risk was a major driver. I suggest directions for future research and possible regulatory changes. (JEL G20, G21, E58, G28)

[We address a fundamental question in relationship banking: why do banks that make relationship loans finance themselves primarily with core deposits and when would it be optimal to finance such loans with purchased money? We show that not only are relationship loans informationally opaque and illiquid, but they also require the relationship between the bank and the borrower to endure in order for the bank to add value. However, the informational opacity of relationship loans gives rise to endogenous withdrawal risk that makes the bank fragile. Core deposits are an attractive funding source for such loans because the bank provides liquidity services to core depositors and this diminishes the likelihood of premature deposit withdrawal, thereby facilitating the continuity of relationship loans. That is, we show that banks will wish to match the highest value-added liabilities with the highest value-added loans and that doing so simultaneously minimizes the bank's fragility owing to withdrawal risk and maximizes the value the bank adds in relationship lending. We also examine the impact of interbank competition on the bank's asset-liability matching and extract numerous testable predictions.]

[We show that the incentive for managers to build their reputations distorts firms' investment policies in favor of relatively safe projects, thereby aligning managers' interests with those of bond-holders, even though managers are hired and fired by shareholders. This effect opposes the familiar agency problem of risky debt that is imperfectly covenant-protected, wherein shareholders are tempted to favor excessively risky projects in order to expropriate bondholders. Consequently, when managerial concern for reputation results in conservatism, it can actually make shareholders better off ex ante by allowing the firm to issue more debt. We examine how the optimal choice of leverage from the shareholders' standpoint is influenced by takeover activity, and how the adoption of anti-takeover measures affects a firm's investment policy and leverage choice.]

I develop a normative theory of political influence on bank lending and capital structure. Legislators want banks to make politically-favored loans that reduce bank profits but generate social or political benefits. The regulator uses asset-choice regulation and capital requirements to induce the lending desired by legislators. There are four main results. First, if regulators dislike bank fragility, then credit-allocation regulation should be accompanied by higher capital requirements. Second, banks will resist higher capital requirements, which will be lower when banks have more bargaining power. Third, when politics matters more in bank regulation, the banking sector is larger and more competitive, with higher capital requirements. Fourth, the optimal reporting mechanism, in which banks report their privately-known profitability and the regulator endogenously determines capital requirements and stringency of credit-allocation regulation in response, shows that political influence is stronger when banks are more profitable.

This paper is a review of the literature on fintech and its interaction with banking. Included in fintech are innovations in payment systems (including cryptocurrencies), credit markets (including P2P lending), and insurance, with Blockchain-assisted smart contracts playing a role. The paper provides a definition of fintech, examines some statistics and stylized facts, and then reviews the theoretical and empirical literature. The review is organized around four main research questions. The paper summarizes our knowledge on these questions and concludes with questions for future research.