Research
Working Papers
Abstract: Banking is increasingly a complex activity. We investigate the output and welfare consequences of banking structures in an economy where lenders use information to screen investment quality and to recover value from failed investments. Complex banking (lenders' joint production of information) eases information production but also facilitates the detection and liquidation of fragile investments. We find that complex banking enhances the resilience to small investment shocks but can amplify the output and welfare responses to large negative shocks. Investment opacity preserves the stabilizing properties of complex banking following small shocks, but increases the chances that complex banking harms welfare after large shocks. The predictions are broadly consistent with evidence from matched bank-firm US data.
Presented at: 2022 ASSA Annual Meeting, CSEF-IGIER 2022, MMM Fall 2022, Portland State University 2022