"Does Government Intervention Affect Banking Globalization?" (with Andrew K. Rose and Tomasz Wieladek), Journal of the Japanese and International Economies, 40 (2016), 43-58
Featured in Vox CEPR's Policy Portal (April 5, 2016)
Abstract: Using data from British and American banks, we provide empirical evidence that government intervention affects banking globalization along three dimensions: depth, breadth and persistence. We examine depth by studying whether a bank’s preference for domestic, as opposed to external, lending (funding) changes when it is subjected to a large public intervention, such as bank nationalization. Our results suggest that, following nationalization, non-British banks allocate their lending away from the UK and increase their external funding. Second, we find that nationalized banks from the same country tend to have portfolios of foreign assets that are spread across countries in a way that is far more similar than either private banks from the same country or nationalized banks from different countries, consistent with an impact on the breadth of globalization. Third, we study the Troubled Asset Relief Program (TARP) to examine the persistence of the effect of large government interventions. We find weak evidence that upon entry into the TARP, foreign lending declines but domestic does not. This effect is observable at the aggregate level and seems to disappear upon TARP exit. Collectively, this evidence suggests that large government interventions affect the depth and breadth of banking globalization, but may not persist after public interventions are unwound.
"Regulation of Compensation and Systemic Risk: Evidence from the UK" (with İrem Tuna), Journal of Accounting Research, 59 (2021), 1123-1175
Featured in Chicago Booth Review (July 09, 2016) and Harvard Law School Forum on Corporate Governance and Financial Regulation (June 17, 2016)
Abstract: This paper studies the consequences of regulating executive compensation at financial institutions by examining the introduction of the UK Remuneration Code in 2010, which aimed to change the decision-making horizon and risk-taking incentives of bank executives. We find that, although both banks and nonbanks show increased contribution and sensitivity to systemic risk in the United Kingdom post-2010, this increase is lower for UK banks, in line with the intent of the regulation. However, UK banks also experience higher unforced CEO turnover when compared to other UK firms. Therefore, while the regulation may have had the desired effect on systemic risk, it may also have given rise to some unintended consequences.
"Observing Enforcement: Evidence from Banking" (with Rimmy E. Tomy), Journal of Accounting Research, 60 (2022), 1583-1633.
Awarded The Bureau Van Dijk Best Paper Award for Banking at SBFC2019
Awarded the 2020 EFA Best Paper Award in Institutions and Markets
Featured in Chicago Booth Review (October 1, 2020)
Finance and Economics Discussion Series 2021-049, Board of Governors of the Federal Reserve System
Abstract: This paper finds that the disclosure of supervisory actions by bank regulators is associated with changes in their enforcement behavior. Using a novel sample of enforcement decisions and orders (EDOs) and a change in the disclosure regime, we find that regulators issue more EDOs, intervene sooner, and rely more on publicly observable signals following the regime change. EDO documents become longer, more complex and contain more boilerplate language. Our results also indicate that intervention happens sooner and more frequently in counties with higher news circulation, which suggests that regulators take into account the public perception of their actions. We evaluate potentially confounding factors, including the S&L crisis and competition from thrifts, and find robust results. We also study bank outcomes and document that uninsured deposits decline at EDO banks in the disclosure regime, especially for those covered in the news. Finally, we observe that bank failure accelerates despite improvements in capital ratios and asset quality. Overall, our research provides new insights on the disclosure of regulatory actions.
"Bank Supervision and Organizational Capital: The Case of Minority Lending" (with Byeongchan An, Robert Bushman, and Rimmy E. Tomy), Journal of Accounting Research, 62 (2024), 505-549.
Featured in Chicago Booth Review (October 3, 2022)
Finance and Economics Discussion Series 2022-036, Board of Governors of the Federal Reserve System
Abstract: We investigate whether improvements in banks' organizational capital and control systems facilitate increased loan origination to minority borrowers. We focus on bank supervisors' enforcement decisions and orders (EDOs) against banks and hypothesize that EDO-imposed improvements in loan policies, internal governance, and employee training mitigate deficiencies in credit assessments and lending decisions that previously disadvantaged minority borrowers. We find that mortgage origination to minority borrowers increases following the resolution of EDOs, and more so for banks with stricter supervisors or more severe EDOs. Using a semisupervised machine learning method to analyze the text of EDOs, we find that such increases are higher for EDOs specifying revisions of loan policies, implementation of formal internal governance procedures, or more employee training. Overall, we find that EDO-driven improvements in organizational capital generate unintended, positive social externalities that enhance access to credit for minority borrowers.
"Consequences of Mandated Bank Liquidity Disclosures"
Abstract: This paper examines the capital market consequences of mandatory disclosures of banks’ liquidity and the resulting changes in banks’ behavior. Employing a hand-collected sample of the disclosures of banks borrowing from the US Federal Reserve Discount Window (DW), I find that these disclosures contain positive incremental market information and decrease banks’ cost of capital. However, I also find evidence of endogenous costs associated with more disclosure as banks respond by increasing liquidity holdings and decreasing risky assets. Following the disclosures, affected banks avoid accessing the DW facility, consistent with the presence of the DW stigma.
"Financial Intermediation through Financial Disintermediation: Evidence from the ECB Corporate Sector Purchase Programme" (with Aytekin Ertan and Marcel Tuijn)
Abstract: We study the spillover effects of financial disintermediation on the supply of credit to small and medium enterprises (SMEs). We find direct central bank lending to large corporations induces banks to increase lending to SMEs by 8 to 12 percent. This effect is stronger for liquidity-constrained banks. SMEs with relationship banks affected by disintermediation borrow approximately €77,750 more relative to SMEs in the same country and industry. SMEs use these funds to invest in real activities and increase employment. We verify that our inferences are not due to changing economic fundamentals, demand from SMEs, or selection in central bank financing. Despite documenting positive effects, we also find that they disappear once new liquidity injections stop and the policy reaches a steady state. Our findings provide some insights into this macroeconomic policy tool's ability to increase employment during the ongoing COVID-19 pandemic through financial disintermediation serving as an additional channel to provide access to financing for SMEs.
"The Impact of Banking Regulation on Voluntary Disclosures: Evidence from the Dodd-Frank Act" (with Li Zhang)
Featured in Columbia Law School Blue Skye Blog (April 3, 2019) and Chicago Booth Review (June 23, 2020)
Abstract: We investigate how the Dodd-Frank Act (DFA) affects voluntary disclosures of large bank-holding companies (BHCs) relative to other banks and unregulated firms in the financial sector. Using a difference-in-differences research design, we find that following the introduction of the DFA, large banks become less likely to issue earnings forecasts containing bad news. They also reduce the frequency of issuing earnings forecasts but increase the frequency of providing forecasts for dividends and return on assets. In earnings-related conference calls, managers of large banks offer information with incrementally higher numerical and forward-looking intensity in both the prepared remarks and their answers to analysts’ questions. Finally, we find that large banks provide incrementally less information than other banks about certain regulated activities and instead focus more on commercial banking financial performance and market innovation. Our findings provide the first evidence of the unintended consequences of the DFA on changes in affected banks’ voluntary disclosures, an important component of the information environment.
"Current Expected Credit Losses (CECL) Standard and Banks' Information Production" (with Sehwa Kim, Seil Kim, and Rongchen Li)
Finance and Economics Discussion Series 2023-063, Board of Governors of the Federal Reserve System
Abstract: We examine whether the adoption of the Current Expected Credit Losses (CECL) model, which incorporates forward-looking information in loan loss provisions (LLPs), enhances banks’ information production. Consistent with better information production, we document significant changes in both financial reporting and operational outcomes following CECL adoption. First, CECL banks' LLPs become timelier and better reflect future local economic conditions. Second, CECL banks experience lower rates of loan defaults. These improvements are more pronounced among banks that invest more in CECL-related information systems and human capital, and are especially salient for larger banks. Our findings suggest that forward-looking accounting standards can enhance banks’ information environments.
"Private Equity and Debt Contract Enforcement: Evidence from Covenant Violations" (with Sharjil Haque)
Finance and Economics Discussion Series 2023-018, Board of Governors of the Federal Reserve System
Abstract: Using the Shared National Credit supervisory data, we find Private Equity (PE) sponsored firms violate loan covenants more often than comparable non-PE firms. However, upon covenant violation, PE-sponsored borrowers experience relatively smaller reductions in credit commitments, suggesting lenders are more lenient with these borrowers. Consistent with this limited-punishment effect, sponsor-backed borrowers experience a smaller increase in loan spread and a reduction in loan maturity upon covenant violations. Limited punishment is driven by the lender's prior relationship with a sponsor through repeated-deals, as well as the higher bargaining power of sponsors in loan renegotiation. Our results indicate sponsors generate financial flexibility by dampening debt contract enforcement for distressed borrowers.
"The Price of Private Equity Fund Transparency in the Secondaries Market" (with Matthias Breuer, Eli Talmor, and Florin Vasvari)
Abstract: We investigate how the transparency of private equity funds sold in the private equity secondaries market is affecting the auction dynamics and the price of the funds. Using detailed bidding data from market auctions organized by one of the largest global advisory firms, we develop measures of private equity fund transparency that capture the extent to which a private equity fund’s investments are observable by bidders and there is less uncertainty about the performance of the underlying investments. We document that less transparent private equity funds receive fewer and lower bids from potential buyers. In addition, the bids submitted for these funds display higher variation, consistent with the interpretation that the information asymmetry associated with opaque funds leads to more disagreement among bidders. Finally, we document that less transparent private equity funds are less likely to be sold and, if they are sold, receive significantly lower winning bids. Our findings indicate that when private equity funds are more difficult to assess, they generate lower demand and higher valuation disparity, which results in lower prices.
"Disciplining Banks through Disclosure: Evidence from CFPB Consumer Complaints" (with Jeffrey Jou, Andrea Passalacqua, Laszlo Sandor, and Rajesh Vijayaraghavan)
We study the depositors' reaction to the disclosure of consumer complaints about their banks. Using the Consumer Financial Protection Bureau (CFPB) complaints data, we find banks subject to prudential CFPB oversight that receive consumer complaints experience a decline in uninsured deposits and respond by increasing offered deposit rates. We also analyze the content of consumer complaints in several ways. First, we find that complaints relating to bank accounts see a larger decline in deposits. Next, we leverage artificial intelligence (AI) tools to explore additional complaint classifications. Using topics identified by ChatGPT, we find complaints containing information on resolution expectations do not lead to similar deposit declines. Overall, our findings provide new evidence on the role of consumer complaints disclosure as a disciplinary mechanism and underscore the potential of AI tools to enhance the classification of complaints and support regulatory oversight.
"The Theory of Financial Stability Meets Reality" (with Nina Boyarchenko and Kinda Hachem)
A large literature at the intersection of economics and finance offers prescriptions for regulating banks to increase financial stability. This literature abstracts from the discretion that accounting standards give banks over financial reporting, creating a gap between the information assumed to be available to regulators in models of optimal regulation and the information available to regulators in reality. We bridge insights from the economics, finance, and accounting literatures to synthesize knowledge about the design and implementation of bank regulation and identify areas where more work is needed. We present a simple framework for organizing the relevant ideas, namely the externalities that motivate bank regulation, the rationales for allowing accounting discretion, and the use of discretion to circumvent regulation. Our takeaway from reviewing work in these areas is that academic studies of bank regulation and accounting discretion require a more unified approach to design optimal policy for the real world.
"Perceptions and Credit Access" (with Abbie J. Smith and Rimmy E. Tomy)
"Banking on Sustainability: Strategic Incentives Behind Sustainability-Linked Loans" (with Xi Li and Yinan Li)
"PPP Loans and Access to Credit" (with Young Hwa Seok)
"Banking on Disagreement: Heterogeneous Credit Risk Assessments in Syndicated Lending" (with Matthew Phillips and Florin Vasvari)
"Secondary Fund Transactions" (with Brenlen Jinkens and Florin Vasvari), in "International Private Equity: A Case Study Textbook," by Eli Talmor and Florin Vasvari (ed.), John Wiley & Sons, April 2011
"Covenant Breach in Private Equity'' (with Sharjil Haque), in "The Palgrave Encyclopedia of Private Equity," by Douglas Cumming and Benjamin Hammer (ed.), Palgrave Macmillan Cham, October 2023