Research

Theory suggests that, by lending to a firm, inside banks gain an informational advantage over non-lender outside banks. This informational gap hinders borrowers from switching lenders due to a winner’s curse faced by competing outside banks, leading to hold-up problems. In this paper, we show that having a deposit relationship with outside banks can reduce this informational gap, thereby attenuating hold-up. Using unique data on the deposit and lending relationships of all firm-bank pairs in Norway, we find that having a deposit relationship with non-lender outside banks significantly increases a firm's likelihood of switching lenders. Furthermore, firms that have a prior deposit relationship with new lenders obtain significantly better loan conditions upon switching. In line with informational hold-up theory, these effects are driven by reduced information asymmetries, not cross-selling strategies. Overall, our paper is the first to show that deposit relationships impact lender competition, with important implications for open banking initiatives.

Link to the paper: Norges Bank Working Paper

Presentations (including scheduled): EFA, FIRS, BIS-CEPR-SCG-SFI Conference on Financial Intermediation, Federal Reserve--FDIC--CSBS Community Banking Research Conference, IBEFA-WEIA, FMA, FEBS, IMFB, University of Zurich, Banco de Portugal, Norges Bank, University College Dublin, KU Leuven, Belgian Financial Research Forum, Benelux Corporate Finance Conference

Regulators around the world increasingly rely on supervisory technologies (SupTech) to support bank supervision. Yet, little is known about how the use of SupTech could affect the banking sector. To address this knowledge gap, we use administrative data from the Central Bank of Brazil to analyze how supervisory actions arising from its SupTech application affect bank balance sheets and lending, and the potential spillover effects to the real economy. We find that the supervisory actions induce banks to reveal inconsistencies in their reported credit risk and to tighten credit to less creditworthy firms, thereby reducing bank risk-taking. In turn, we find that this credit tightening affects the performance of less creditworthy firms that borrow from affected banks. Further tests suggest that these results are due to a supervisory scrutiny channel, which induces banks to become more prudent. Overall, our findings provide novel insights into the role of SupTech in bank supervision, with valuable policy implications.

Presentations (including scheduled): AFA, BIS-CEPR-SCG-SFI Conference on Financial Intermediation, MoFiR Workshop on Banking,  ECB Banking Supervision Conference, Cambridge Annual Conference on Alternative Finance, JFI-CFAR-UNC-Gothenburg Conference on Frontier Risks, Financial Innovation and Prudential Regulation of Banks, Endless Summer Finance Conference, BOFIT Workshop on Banking and Finance in Emerging Markets, Banque de France ACPR Seminar, AEFIN, CUNEF Workshop on Current Topics in Finance, IBEFA-WEIA, FMA, Norges Bank, Bank of Italy-Bocconi University-CEPR Conference on Financial Stability and Regulation, BIS, NHH Norwegian School of Economics, KU Leuven, Belgian Financial Research Forum

Awards: FMA Europe Best Paper Award

Theory offers conflicting predictions on whether and how lenders' sectoral specialization affects firms’ innovation output. We show that the sign and the magnitude of this effect varies with the degree of ''asset overhang'' risk across sectors, which is the risk that a new technology has negative spillovers on the value of a bank's original loan portfolio. Using both patent data and micro-level survey data on firms' innovation output, we find that lenders' sectoral specialization improves innovation for firms operating in sectors with low asset overhang risk, but impedes innovation for firms operating in sectors with high asset overhang risk. These results hold for four different measures of asset overhang risk and various robustness checks. We further find that these heterogeneous effects arise through financial contracting. On average, bank specialization eases firms' financing conditions, but this does not hold for firms operating in innovative sectors with high asset overhang risk. Overall, our findings provide novel insights into the dual facets of bank specialization and, more broadly, the link between banking and innovation.

Presentations (including scheduled): Banco de Portugal-CEPR Conference on Financial Intermediation, Essex University EFiC Conference, Banque de France ACPR Seminar, Tri-City Day-Ahead Workshop on the Future of Financial Intermediation, BIS, Florence School of Banking and Finance, University of Zurich, Belgian Financial Research Forum, Belgian Science Policy Office, BOFIT Workshop on Banking and Finance in Emerging Markets

We study how different types of fiscal support implemented during the COVID-19 crisis affected banks’ credit risk. To do so, we collect data on fiscal support measures implemented by 37 countries and classify these measures into direct support and liquidity support. The former refer to cash transfers and tax deferrals, while the latter refer to government-guaranteed loans and equity injections. Based on this, we show that only direct support reduced banks’ loan loss provisions during the COVID-19 crisis. To explain this finding, we show that only direct support reduced borrowers' default risk and thereby mitigated banks' loan losses. These results provide important policy implications related to the design of fiscal support measures and macroprudential regulation in the banking sector.

Link to the paper: Published version, SSRN version