How did deposit interest rate ceilings, an important feature of the U.S. regulatory regime until the mid-1980s, affect individual banks’ lending and the transmission of monetary policy to credit? I estimate the effect of deposit rate ceilings inscribed in Regulation Q on commercial banks’ credit growth using a historical bank level data set starting in 1959. Banks’ credit growth contracted sharply when legally fixed deposit rate ceilings were binding. Interaction terms with monetary policy suggest that the policy impact on bank level credit growth was non-linear and significantly larger when rate ceilings were in place. Bank size and capitalization mitigate these effects. At the bank level, short-term interest rates exceeding the legally fixed deposit rate ceilings identify policy induced credit supply shifts that disappeared with deposit rate deregulation and thus weakened the bank lending channel substantially since the early 1980s.

Starting in the 1990s, US bank assets grew more concentrated among a few large institutions. We explore the changing role of idiosyncratic volatility as a shaping force of the bank asset power law distribution. Our results reveal that idiosyncratic asset volatilities for bank-holding companies declined since the 1990s. To the extent that firm-specific shocks can have significant macroeconomic consequences, this result implies that even as one obvious source of aggregate risk and contagion--bank asset concentration--has increased, another important source--idiosyncratic volatility--has diminished.

Cases the Federal Deposit Insurance Corporation (FDIC) pursues against the directors and officers of failed commercial banks for (gross) negligence are important for the corporate governance of U.S. commercial banks. These cases shape the kernel of bank corporate governance, as they guide expectations of bankers and regulators in defining the limits of unacceptable behaviour under financial distress, such as risk shifting. We examine the differences in behaviour of all 408 U.S. commercial banks that were taken into receivership between 2007 and 2012. Sued banks had different balance sheet dynamics relative to those who are not sued in the three years prior to failure. These banks were generally larger, faster growing, obtained riskier funding and tended to underprovision. We find evidence that boards of failing banks respond to litigation by reducing the use of riskier funding in an out-of-sample set of banks. Our results suggest the FDIC does set corporate governance standards for all banks by suing negligent directors and officers.

Economic policy uncertainty affects decisions of households, businesses, policy makers and financial intermediaries. We first examine the impact of economic policy uncertainty on aggregate bank credit growth. Then we analyze commercial bank entity level data to gauge the effects of policy uncertainty on financial intermediaries’ lending. We exploit the cross-sectional heterogeneity to back out indirect evidence of its effects on businesses and households. We ask (i) whether, conditional on standard macroeconomic controls, economic policy uncertainty affected bank level credit growth, and (ii) whether there is variation in the impact related to banks’ balance sheet conditions; that is, whether the effects are attributable to loan demand or, if impact varies with bank level financial constraints, loan supply. We find that policy uncertainty has a significant negative effect on bank credit growth. Since this impact varies meaningfully with some bank characteristics – particularly the overall capital-to-assets ratio and bank asset liquidity-loan supply factors at least partially (and significantly) help determine the influence of policy uncertainty. Because other studies have found important macroeconomic effects of bank lending growth on the macroeconomy, our findings are consistent with the possibility that high economic policy uncertainty may have slowed the U.S. economic recovery from the Great Recession by restraining overall credit growth through the bank lending channel.

In the boom before the Great Depression, capital requirements for commercial banks were low and fixed. Bankers faced double liability. Failing banks were not bailed out. During the boom before the Great Recession, capital requirements were proportional to risk-weighted assets. Bankers faced limited liability. Banks deemed too big to fail received bailouts. During the 1920s, the largest banks increased capital levels as asset prices rose. During the boom from 2002 to 2007, the largest institutions kept capital levels near regulatory minimums. Our results suggest more market discipline would have induced the largest U.S. banks to hold greater capital buffers prior to the financial crisis of 2008.

Ongoing financial innovation raises the specter of banking and payment crises. Little aggregate evidence exists on the repercussions of substantial suspensions of payments. State-level experiments fill this gap. Four times in the last forty years, U.S. governors suspended payments from state-insured depositories. Rhode Island’s deposits crisis (1991), which was large, prolonged, and occurred during a recession, substantially lengthened and deepened the downturn. Deposits freezes in Nebraska (1983), Ohio (1985), and Maryland (1985), which were short and occurred during expansions, had little macroeconomic impact. Data sparsity inhibits analysis of these events with standard methods. To perform inference, we develop a novel Bayesian method for synthetic control, which generates output useful for policymakers and theorists. Our findings suggest policies that ensure institutions continue to process payments on a business-as-usual basis at all times have substantial value.