Banks in the US have been competing with investment banks through newly created “Section 20” subsidiaries. The evidence to date suggests that banks entry into securities activities via these subsidiaries has been pro-competitive. Recently, however, banks have been allowed to enter securities activities via acquisitions. This may not result in the same competitive effects as “new bank” entry.

This paper empirically examines contagion effects of bank failures by analyzing the behavior of deposit flows in a sample of failed and healthy banks over the 1929–1933 period. We find evidence of contagion for 1930–1932, while none seems to have existed in 1929 or 1933. In addition, the pace of contagion accelerated over 1930–1932. We find that even during 1930–1932, failing-bank deposit outflows exceeded those at a matched control sample of nonfailing banks. This finding is consistent with the presence of a significant number of informed depositors who distinguished among ex ante failing and nonfailing banks.Journal of Economic LiteratureClassification Number: G21.

This paper examines cross-subsidy, moral hazard, and bank liability issues related to the provision of federal deposit insurance by "rerunning" its implementation, i.e., determining fair premium values, over the period 1927-1932. The pre-1933 period was characterized by historically high asset-price volatility, a large number of bank failures, and a weak federal safety net. In this economic context, we find a high degree of self-insurance on the part of the banks in our sample, both in terms of higher overall capital levels and a strong correlation between capital levels and asset volatility. Potentially large, regional cross-subsidies among banks were also found. Journal of Economic Literature Classification Number: G21.

Anthony Saunders, Michael Smirlock, Intra- and Interindustry Effects of Bank Securities Market Activities: The Case of Discount Brokerage, The Journal of Financial and Quantitative Analysis, Vol. 22, No. 4 (Dec., 1987), pp. 467-482

Using a new dataset of UK-syndicated loans, we document a significant loan cost disadvantage incurred by privately held firms. For identification, we use the distance of a firm's headquarters to London's capital markets as a plausibly exogenous variation in corporate structure (i.e., public/private) choice. We analyze the channels of the loan cost disadvantage of being private by documenting the importance of: the higher costs of information production, the lower bargaining power, the differences in ownership structure, and the differences in secondary market trading. Interestingly, we find no evidence that lenders price expected future performance into the loan spread differential.

[Using a new dataset of UK-syndicated loans, we document a significant loan cost disadvantage incurred by privately held firms. For identification, we use the distance of a firm's headquarters to London's capital markets as a plausibly exogenous variation in corporate structure (i.e., public/private) choice. We analyze the channels of the loan cost disadvantage of being private by documenting the importance of: the higher costs of information production, the lower bargaining power, the differences in ownership structure, and the differences in secondary market trading. Interestingly, we find no evidence that lenders price expected future performance into the loan spread differential.]

This paper investigates whether monitoring by bank lenders affects CEO incentives of borrowing firms. We find that an increase in bank monitoring incentives significantly reduce the sensitivity of CEO wealth to stock return volatility (Vega). The results are more profound when bank lenders are more powerful and reputable and have a prior lending relationship with the borrowing firms. Additionally, Vega decreases after financial covenant violations and increases when bank lenders have offsetting equity stakes in borrowing firms. The reduction in Vega due to bank monitoring has some real effects on borrowing firms’ corporate policies. These results together suggest banks have a unique role in monitoring and shaping CEO incentives to mitigate the risk-shifting incentives of firm managers.

This study investigates bank consolidation and safety-net support provision in Canada, the UK and the US over a 100-year historical period, and the impact of these policy variables on bank capital and risk-taking choices. The study finds that consolidation and strengthened safety nets have largely supplanted the historical role of high bank capital levels in providing protection to risk-adverse depositors. Furthermore, despite strengthened safety-net guarantees, the study finds that bank asset-risk choices in the 1980s are comparable to those observed in the 1890s, while bank equity volatilities have shown approximately a 10-fold increase over this period. Finally, the study finds that bank capital ratios are as asset-risk sensitive in the 1980s as those in the 1890s, perhaps reflecting residual market discipline or regulatory moral-suasion effects.