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We study the run on the German banking system in 1931 to understand whether depositors anticipate which banks will fail in a major financial crisis. We find that deposits decline by around 20% during the run. There is an equal outflow of retail and nonfinancial wholesale deposits from both failing and surviving banks. In contrast, we find that interbank deposits almost exclusively decline for failing banks. Our evidence suggests that banks are better informed about which fellow banks will fail. In turn, banks being informed allows the interbank market to continue providing liquidity even during times of severe financial distress. [ABSTRACT FROM AUTHOR]

A two-sided "credit-line channel"—relating to drawdowns and repayments—explains the severe drop and partial subsequent recovery in bank stock prices during the COVID-19 pandemic. Banks with greater exposure to undrawn credit lines saw larger stock price declines but performed better outside of crises periods. Despite deposit inflows, high drawdowns led to reduced bank lending, suggestive of capital encumbrance upon drawdowns. Repayments of credit lines unencumbered capital which explains the stock price recovery starting Q2 2020. Bank provision of credit lines resembles writing put options on aggregate risk, and we propose how to incorporate this feature into bank stress tests. [ABSTRACT FROM AUTHOR]

We analyze a dynamic credit market where banks choose lending standards, modeled as costly effort to screen out bad borrowers. Tighter standards worsen the borrower pool, increasing banks' incentives to employ tight standards in the future. This dynamic complementarity in lending standards can amplify and prolong downturns, decreasing lending and increasing credit spreads. Because lending standards have negative externalities, the market can converge to a steady state with inefficiently tight lending standards. We discuss the role of optimal policy to avoid this outcome as well as the impact of balance sheet costs on lending standards. [ABSTRACT FROM AUTHOR]

How much of a loan should a lender retain, and how do loan sales affect loan performance? We address these questions in a model in which a lender originates loans that it can sell to investors. The lender reduces default risk through screening at origination and monitoring after origination, but is subject to moral hazard. The optimal lender-investor contract can be implemented by requiring the lender to initially retain a share of the loan that it gradually sells to investors, rationalizing loan sales after origination. The model generates novel predictions linking loan and lender characteristics to initial retention, sales dynamics, and loan performance. [ABSTRACT FROM AUTHOR]

We show that lender of last resort (LOLR) policy exacerbates bank interconnectedness. Using novel micro-level data, we analyze LOLR's haircut gaps: the differences between the private market and central bank haircuts. LOLR policy incentivizes banks to increase pledging and holdings of higher haircut-gap bonds, especially those issued by domestic and systemically important banks. Effects only apply to banks, not to nonbanks without LOLR access. LOLR funding revives bank bond issuance associated with higher haircut gaps and increases the subsequent correlation between pledging and issuing banks' bond prices, in particular during periods of low-market returns and for domestic, systemically important banks. [ABSTRACT FROM AUTHOR]

We identify two issues in the work of Ouazad and Kahn (2022). Correcting either reverses the original result. The two changes are to use the correct FHFA conforming loan limits for each county and year and to compare the individual loan amount to that limit correctly. There is no evidence that lenders transfer climate risk by altering loan origination and securitization behavior. None of our results calls into question the value and importance of the O&K model as a test for adverse selection. The question addressed and the setup of the test are important and should be replicated over time. [ABSTRACT FROM AUTHOR]

We estimate the effect of carbon pricing policy on bank credit to greenhouse-gas-emitting firms. Our analyses exploit the geographic restrictions inherent in California's cap-and-trade bill and a discontinuity in the embedded free permit threshold of the federal Waxman-Markey cap-and-trade bill. Affected high emission firms face shorter loan maturities, lower access to permanent forms of bank financing, higher interest rates, and higher participation of shadow banks in their lending syndicates. These effects are concentrated among private firms, while credit terms of public firms are largely unaffected. Overall, we show that banks respond quickly to realizations of transition risk. [ABSTRACT FROM AUTHOR]

We test for gender bias in promotions at financial institutions using two central predictions of Becker's (1957 , 1993) model: firms with bias will (1) raise the promotion bar for marginally promoted female workers, and (2) incur costs from forgoing efficient employment practices. We find support for both of these predictions using a new nationwide panel of mortgage loan officers and their managers encompassing approximately 72,000 workers from over 1,000 shadow banks from 2014 to 2019. Overall, our findings provide evidence that gender bias is an important factor in gender gaps at financial institutions. [ABSTRACT FROM AUTHOR]

We find that disclosing bank-specific information reallocates systemic risk, but whether it mitigates systemic bank runs depends on the nature of information disclosed. Disclosure reveals banks' resilience to adverse shocks and shifts systemic risk from weak to strong banks. Yet, only disclosure of banks' exposure to systemic risk can mitigate systemic bank runs because it shifts systemic risk from more vulnerable banks to those less vulnerable. Disclosure of banks' idiosyncratic shortfalls of funds does not differentiate such exposure, rendering the resultant reallocation of systemic risk ineffective in mitigating systemic runs. [ABSTRACT FROM AUTHOR]

Stress tests convey information about the strictness of future tests, creating incentives for banks to alter their future lending behavior. Regulators recognize and use this influence: they may conduct softer stress tests to encourage lending or tougher stress tests to reduce risk-taking. This information management can lead to inefficiencies when (a) the test loses credibility or (b) the test becomes self-fulfilling. In addition, banks may distort their lending behavior in anticipation of the stress test design, leading to further surplus losses. The analysis applies to banking supervision and regulation more broadly. [ABSTRACT FROM AUTHOR]

Basel I introduced capital requirements for undrawn commitments, but only for revolvers with an original maturity greater than one year. We use this regulatory discontinuity to estimate the impact of capital regulation on the cost and composition of credit. Following Basel I, short-term commitment fees declined relative to long-term commitments and issuance of short-term facilities increased. Our results highlight the sensitivity of credit provision to capital regulation, particularly for banks with less capital. We are able to infer that low-capital banks are willing to forego twice as much income from fees to reduce required regulatory capital by a dollar. [ABSTRACT FROM AUTHOR]

We analyze the distributional effects of macroprudential policy on mortgage cycles by exploiting the U.K. mortgage register and a 2014 15% limit imposed on lenders' high loan-to-income (LTI) mortgages. Constrained lenders issue fewer and more expensive high-LTI mortgages, with stronger effects on low-income borrowers. Unconstrained lenders strongly substitute high-LTI loans in local areas with higher constrained lender presence, but not high-LTI loans to low-income borrowers—consistent with adverse selection problems—implying lower overall credit to low-income borrowers. Consistently, policy-affected areas experience lower house price growth postregulation and, following the Brexit referendum (negative aggregate shock), better house price growth and lower mortgage defaults for low-income borrowers. [ABSTRACT FROM AUTHOR]

We characterize the interaction between banks' liquid assets purchases and deposit issuance decisions. Using global games, we derive a liquidity multiplier : the amount of deposits a bank can create when endowed with one additional unit of liquid asset to maintain a given level of liquidity risk. In our central theorem, we prove it is larger than unity. This entails that banks have a special role in enhancing liquidity provision, "multiplying" liquid assets into a larger quantity of deposits. Our theory has implications for banks' balance sheet choices, the pricing of liquid securities, and the role of public liquidity provision. [ABSTRACT FROM AUTHOR]

We examine innovation following the Great Depression using data on a century's worth of U.S. patents and a difference-in-differences design that exploits regional variation in the crisis severity. Harder-hit areas experienced large and persistent declines in independent patenting, mostly reflecting the disruption in access to finance during the crisis. This decline was larger for young and inexperienced inventors and lower-quality patents. In contrast, innovation by large firms increased, especially among young and inexperienced inventors. Overall, the Great Depression contributed to the decline in technological entrepreneurship and accelerated the shift of innovation into larger firms. [ABSTRACT FROM AUTHOR]

We propose a model of strategic renegotiation in which businesses are sequentially interconnected through their liabilities. This financing structure, which we refer to as a credit chain, gives rise to externalities, as each lender's willingness to provide concessions to its borrower depends on how this lender's own liabilities are expected to be renegotiated. We highlight how government interventions aimed at preventing default waves should account for private renegotiation incentives and interlinkages. In particular, we contrast the consequences of targeted subsidy and debt reduction programs following economic shocks, such as pandemics and financial crises. [ABSTRACT FROM AUTHOR]

We study the design of stress tests that provide information about aggregate and idiosyncratic risk in banks' portfolios and impose contingent capital requirements. In the optimal static test, an adverse scenario fails all weak and some strong banks, limiting the stigma of failure. Sequential tests outperform static tests. Under natural conditions, the optimal sequential test consists of a precautionary recapitalization, followed by a scenario that fails only weak banks, similar to TARP in 2008, followed by SCAP in 2009. Our results also shed light on the Federal Reserve's decision to test the banks twice in 2020 during the COVID-19 pandemic. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

Using the near universe of U.S. consumer credit cards, we show that banks transmit their wholesale funding shocks to consumers by reducing their credit card limits. Credit-constrained consumers who are unable to hedge against the transmitted shock by accessing other credit cards experience a stronger and more persistent reduction in aggregate credit card limits at the consumer level. Consequently, these credit-constrained consumers reduce their aggregate credit card borrowing. Our results document a credit card lending channel for the transmission of adverse bank shocks and show who bears the costs of fragile bank funding structures. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

How does creditor health affect the pass-through of monetary policy to households? Using data on the universe of U.S. credit unions, I document that creditor asset losses increase the sensitivity of consumer credit to monetary policy. Identification exploits plausibly exogenous variation in asset losses and high-frequency identification of monetary policy shocks. Weaker lenders can respond more if they face financial frictions that easing alleviates. The estimates imply constraints on monetary policy become more costly in financial crises featuring creditor asset losses and that an additional benefit of monetary easing is that it weakens the causal, contractionary effect of asset losses. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online [ABSTRACT FROM AUTHOR]

Using account-level credit card data from a large Turkish bank, we study the impact of a unique credit card policy that increases minimum payment on consumption and debt repayment. We show that the policy reduces credit card spending and debt, boosts existing debt repayment, and reduces credit card delinquency. The credit card debt of affected consumers falls on average by 50 |$\%$| two years into the policy's implementation. An increase in minimum payment has a stronger effect than does a decrease of a similar magnitude. We build a benchmark life cycle model with soft liquidity constraint to explain the reduction in credit card spending. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

The U.S. banking sector had nearly 70% fewer banks in 2022 relative to 1989, primarily because of mergers. We develop a methodology to estimate cross-market spillover effects of bank mergers and test whether the operations of incumbents facing consolidating competitors in one market are affected in other markets. We find that nonmerging banks within a market that are one standard deviation more exposed to mergers in other markets increase deposits by 2.1% relative to their less exposed competitors. Our methodology may be applied elsewhere to assess the aggregate impacts of industry consolidation and illustrates challenges with product-based or geographic market definitions. [ABSTRACT FROM AUTHOR]

Purpose: This study aims to examine the influence of voluntary disclosure on bank value in Pakistan, considering the moderating effect of corporate governance characteristics: ownership control, board independence and board size. Design/methodology/approach: The study uses data from 20 listed Pakistani banks for the period 2011–2021. The estimation contains robust fixed effect and its assumptions, and a model of standard error with panel corrections. Findings: The findings revealed a weak positive impact of voluntary disclosure on bank value. However, the increase in the number of independent directors strengthens the positive impact of voluntary disclosure on a bank's value. Conversely, increasing the ownership concentration, and board size (other than independent directors) may strongly decrease the impact of voluntary disclosure on a bank's value in Pakistan. Research limitations/implications: The study's limitations include its exclusive focus on the Pakistani banking industry. Future research should take into account newer contexts and data. The findings suggest that future research should investigate the topic in various contexts, including a comparison of Islamic and conventional banks. Practical implications: The practical implications for Pakistani banks emphasize transparency, board composition and ownership structure. In terms of managerial implications, using independent directors, aligning ownership interests and addressing disclosure challenges are highlighted. Originality/value: Focusing on independent directors, ownership concentration and board size, this study enhances knowledge of the impact of voluntary disclosure on bank value in Pakistan. It contributes to agency theory and the literature in this domain. [ABSTRACT FROM AUTHOR]

AbstractThis article explores Walter Bagehot’s (1826–1877) proposals for improvement of the governance of the Bank of England after the Charter Act (1844). In his book Lombard Street (1873), Bagehot addresses the inherent dilemma faced by the Bank of England since its establishment in 1694. On one hand, it was a joint-stock bank with private shareholders, while on the other, it was entrusted with fundamental responsibilities for the public interest, including lending to the state, restructuring public debt, holding the nation’s gold reserve, and managing liquidity crises. According to Bagehot, if the Bank of England succeeded in solving this dilemma, it was mainly thanks to the implementation of governance principles that he introduced and discussed. The contribution of this article is to highlight Bagehot’s original proposals on central bank governance and their significance in reconciling the interests of the diverse stakeholders of the ‘Old Lady of Threadneedle’. Central bank governance in Bagehot is a topic that has not yet been discussed. [ABSTRACT FROM AUTHOR]

The aim of this study is to classify scientific research on the impact of ESG and climate-related risks on the conduct of the banking business. The systematic literature review was based on a bibliometric analysis of articles found in the Scopus and Web of Science databases. The search was confined to materials published between 2000 and August 2023. After applying criteria limiting the search, the final result was 869 unique literature items which were later analysed towards establishing the relationship of ESG and climate-related risks ('new banking risks') with other (so-called 'traditional') banking risks and identifying research gaps at the interface between traditional and new banking risks. This article introduces a variety of findings, including the most productive authors, organisations, countries and journals, the most cited articles and keyword distribution. In addition, a map of the evolution of the approach to ESG risk in banking was constructed on the basis of the literature review. The study identified 11 clusters of banking risk influenced by ESG risk and 10 clusters of banking risk affected by climate-related risk. [ABSTRACT FROM AUTHOR]

This paper examines the impact of international automatic exchange of information (AEOI) treaties on cross-border investments in tax havens. Using a restricted version of the BIS Locational Banking Statistics, we find that AEOIs significantly reduced cross-border deposits. A sectoral breakdown assessment reveals that households were the key driving force behind this contraction. However, we also document evidence of households' deposits shifting to non-AEOI haven countries and larger deposits by non-bank financial institutions between tax haven countries, suggesting an increased use of shell corporation networks since AEOI introduction. Extending the analysis to portfolio and direct investment, we observe that changes in investment patterns vis-à-vis tax havens are consistent with a significant impact of AEOI treaties on these forms of cross-border investment. [ABSTRACT FROM AUTHOR]

This paper investigates the balance between social and financial sustainability goals in the European microfinance sector using an original dataset obtained from a survey conducted in 2016–2017 on 159 microfinance institutions (MFIs) operating in 38 European countries. Overall, our results show that MFIs that are more likely to comply with their social sustainability objectives are also doing well financially. The only aspect on which social sustainability does not seem to have a positive effect on financial sustainability is the financing of the poorest through the provision of small-scale loans. A phenomenon that seems peculiar to the European context is that larger MFIs operating in countries with stringent financial regulation tend to show a comparative advantage and better withstand competition from the traditional banking sector. However, a separate issue that deserves attention is the specific regulation on interest rates, which seems to penalize the MFIs operating in countries imposing interest rate caps due to the impossibility to pass on the high unit costs of microlending to borrowers. Our results are robust to alternative measures of financial sustainability and to the use of the Generalized Method of Moments (GMM) and Instrumental Variable (IV) estimation techniques to overcome the problem of endogeneity. Plain English Summary: European Microfinance Institutions that more tightly pursue social objectives are also more likely to be financially sustainable but are penalized by regulatory restrictions on interest rates. The microfinance sector underwent a significant global expansion in recent years, creating chances for underprivileged and vulnerable groups, particularly women entrepreneurs, to start their businesses. The balance between social and financial sustainability is one of the most hotly debated themes in a growing number of studies, although there is little empirical evidence on the European microfinance sector. In this paper, we provide one of the first pieces of evidence of this relationship in the European context. Our findings have important implications for researchers, policymakers, and society as a whole. The research reveals that European Microfinance Institutions (MFIs) that more tightly pursue social objectives are also more likely to be financially sustainable. Furthermore, smaller MFIs appear to achieve a double bottom line more easily, especially targeting higher shares of women borrowers. The critical aspect of European MFIs appears to be their greater reliance on subsidies, as well as a regulation that is ill-suited to the microfinance sector, especially regarding interest rate caps. Thus, a more structured regulatory framework focused on social sustainability variables could improve microfinance effectiveness in the coming years. [ABSTRACT FROM AUTHOR]

Purpose: Sudden and unannounced policy changes by the government that provide banks with windfall deposits creates a challenge in terms of resource deployment. In the process, there is an impact on their risk and returns. Using data on domestic Indian commercial banks, this study aims to examine the impact of such an announcement – the 2016 demonetisation episode – on bank behaviour. Design/methodology/approach: Using data on domestic Indian commercial banks during 2010–2020, the paper investigates the effect of a sudden and unannounced policy change on their risk and returns. Using the demonetisation undertaken in November 2016 as a natural experiment, the paper applies the difference-in-differences methodology to tease out the causal impact. Findings: The findings reveal a decline in risk and an increase in returns of state-owned banks, consistent with a flight-to-safety. The response differed in terms of market and accounting measures and across state-owned banks with differing levels of capital and asset quality. Originality/value: Although several aspects of the demonetisation episode have been well analysed, its impact on banks – the main conduits of the exercise – and in particular on their risk and returns, is an unaddressed area of research. Viewed from this standpoint, this is one of the early studies to undertake a comprehensive empirical analysis on this aspect. [ABSTRACT FROM AUTHOR]

Purpose: The primary objective of this study aims to intensively explore the environment of Indonesian regulations and laws related to the Islamic banking system and micro-, small- and medium-sized enterprises (MSME) and unveil the restrictive laws and regulatory flaws that potentially hinder the Islamic banking institution and MSME industry in achieving financial inclusion and promoting sustainable growth. Design/methodology/approach: This paper implements a qualitative method by implementing a multi-case study research strategy, both from the Islamic banking institutions and the MSME industries. The data were gathered primarily through an interview approach by adopting purposive uncontrolled quota sampling. Findings: The findings of this paper reveal two essential issues: First, the regulatory imbalances and restrictions could demotivate and hinder the efforts of Islamic banks in providing access to finance for the MSME segment, hence, encumbering the achievement of the financial inclusion agenda from the Islamic banking industry. Second, the flaws in MSME registration and taxation might discourage the formal MSMEs from extending their business license and prevent the informal MSME units from registering their business. This issue would potentially lower their chance of accessing external financing from the formal financial institutions and participating in supportive government programmes due to the absence of proper legality. Research limitations/implications: Since this paper only observed six Islamic banks and 22 MSME units in urban and rural locations in Indonesia using a case study approach, the empirical findings and case discussions were limited to those respective Islamic banks and MSME participants. Practical implications: By referring to the recommendations as presented in this paper, two critical policy implications could be expected from adopting the proposed recommendations, among others: By addressing the issues of the regulatory imbalance associated with the Islamic banking industry and introduce the deregulatory policies on profit and loss sharing (PLS) scheme implementation, this approach will motivate the Islamic banking industry in serving the MSME sector better and provide greater access to financial services, particularly in using the PLS financing schemes. By resolving the problems on MSME registration and taxation, this strategy will enhance the sustainability of the formal MSMEs' operation and encourage the informal ones to register, hence, improving their inclusion into the formal financing services and government assistance programmes. Originality/value: The present study attempts to address the literature shortcomings and helps to fill the gaps – both theoretical and empirical – by incorporating the multi-case study among Indonesian Islamic banks and MSMEs to extensively explore the Indonesia regulatory environment pertaining to the Islamic banking system (supply-side) and MSMEs (demand-side), and thoroughly investigates and reveals the restrictive laws and regulatory flaws that could potentially hinder the Islamic banking institutions and MSME industries in attaining financial inclusion and contributing to sustainable development. [ABSTRACT FROM AUTHOR]

Purpose: This paper aims to examine the relationship between board structure and risk-taking, exploring how this association is influenced by advanced technologies in the banking sector. Design/methodology/approach: This study uses a panel sample of 22 Pakistani banks from 2011 to 2018. To test the authors' hypothesis, the authors use regression analysis with two-way cluster robust standard errors. Further, the authors also check the robustness of the authors' findings using alternate proxies of board structure and bank risk-taking behavior. To address endogeneity concerns, the authors use the two-stage least square technique. Findings: In the era of the Fourth Industrial Revolution, Pakistani banks' digitalization is modeled by the presence of Temenos-T24/Oracle as their core banking system (software providing end-to-end operational integration). Its interactional effect with corporate governance is evaluated to implicate informed risk-taking by the board as a result of improved information access and analysis. The authors find that board size has a positive association with risk-taking, and the use of modern technology reshapes this association in the banking sector. Originality/value: The contribution of this paper is twofold. First, the impact of board structure on bank risk-taking has not been extensively researched in Pakistan – a highly volatile and unpredictable economy. Second, the evaluation of the role of technology on bank risk is being researched for the very first time – a uniqueness of this paper. [ABSTRACT FROM AUTHOR]

We propose a method based on control charts to identify in real-time sudden deposits outflows through the payment system. The performance of the methodology is assessed with both Monte Carlo simulations and real transaction-level TARGET2 data for a large sample of Italian banks. We identify a set of idiosyncratic bank stress episodes. Using high-frequency payment system data, we provide new evidences on the interaction between retail, wholesale, and central bank funding in the post global financial crisis period. [ABSTRACT FROM AUTHOR]