We investigate how supervisory enforcement actions (EAs) against banks affect their business borrowers. We find negative short-term valuation effects of EAs for large relationship borrowers, which are reversed after new loans are granted. Large non-relationship borrowers' valuations are unaffected by EAs, but turn negative after relationships are established with sanctioned banks. Additionally, sanctioned banks appear to offset uncertainty and reputational damage of EAs by improving credit terms and availability for relationship and non-relationship large businesses, but decrease credit availability to small businesses. The small business credit contraction may have significant negative economic consequences due to bank dependency and credit constraints.

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.

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.

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.

Theory suggests that government aid to banks may either reduce or increase systemic risk. We are the first to address this issue empirically, analyzing the Troubled Assets Relief Program (TARP). Analysis suggests that TARP significantly reduced contributions to systemic risk, particularly for larger and safer banks, and those in better local economies. This occurred primarily through a capital cushion channel that reduced market leverage by increasing the value of common equity. Results are robust to endogeneity and selection bias checks. Findings yield policy conclusions about whether to aid banks, the best targets for future assistance, and short-term versus long-term effects.

The U.S. bank stress tests aim to improve financial system stability. However, they may also affect bank credit supply. We formulate and test opposing hypotheses about these effects. Our findings are consistent with the Risk Management Hypothesis, under which stress-tested banks reduce credit supply−particularly to relatively risky borrowers−to decrease their credit risk. The findings do not support the Moral Hazard Hypothesis, in which these banks expand credit supply−particularly to relatively risky borrowers that pay high spreads−increasing their risk. Results are generally stronger for safer banks, banks that passed the stress tests, and the earlier stress tests.

The literature demonstrates numerous consequences of bank geographic deregulation, but neglects bank capital structure – critical to performance, resilience, and prudential regulation/supervision. We supply first-time evidence on geographic deregulation effects on bank capital. We also distinguish and test two novel mechanisms through which geographic deregulation may affect bank behavior. The competitive defense and competitive offense mechanisms differentiate deregulation effects in increasing external competitive pressures on banks versus expanding banks’ capacity to compete externally. We find statistically and economically significant evidence of geographic deregulation effects on two bank capital management tools – target capital ratios and speeds of adjustment to these targets – yielding higher targets and faster adjustment. Findings are robust to addressing identification concerns using dynamic panel methodology, a gravity-deregulation approach, and time-varying bank-specific instruments. The data also support both the competitive defense and competitive offense mechanisms, suggesting future research and policy applications of these mechanisms to banking and more generally.

We conduct the first broad-based international study on bank-level failures covering 92 countries over 2000–2014, investigating national cultural variables as failure determinants. We find individualism and masculinity are positively associated with bank failure, but they operate through different channels. Managers in individualist countries assume more portfolio risk, while governments in masculine countries allow banks to operate with less liquidity and less often bail out troubled institutions. Findings are robust to accounting for endogeneity, different techniques and measures, and additional controls. Results have implications for prudential policies, including regulation, supervision, and bailout strategies, that may partially mitigate some negative effects of culture.

We challenge the existing relationship lending literature on how banks manage their relationships with corporate borrowers during crises. We test theories of intertemporal smoothing during the closure period of the COVID-19 crisis when borrowers are in great need of relationship benefits. We find that relationship borrowers receive worse rather than more favorable loan contract terms than others during this period. These and other results provide novel evidence on the functioning of relationship lending during a pandemic and contrast existing evidence gleaned from banking and financial crises.