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.
Abstract: This paper examines how internally generated intangible capital shapes merger patterns and postmerger performance in the U.S. banking sector. We construct a novel measure of intangible capital using granular regulatory expense data and quantify assortative matching between acquirers and targets. Employing a difference-in-differences design with propensity score matching, we causally show that higher assortative matching in intangible capital leads to significant improvements in post-merger bank performance. We complement the empirical analysis with a dynamic search-theoretic model of bank mergers, demonstrating that strategic complementarities in intangibles give rise to assortative matching equilibria. Our findings provide new insights into banking consolidation.
Best Paper in Banking Award, The Sydney Banking and Financial Stability Conference 2025