Research

Research Areas

Financial Intermediation

My research on financial intermediation asks what drives the industrial organization of the financial sector and how it affects lenders, borrowers, and the macroeconomy. Since the  1980s, the US financial system has undergone a dramatic process of disintegration, decoupling deposit taking, loan origination, ownership, and monitoring from integrated banks. These activities have largely moved to separate financial institutions.  My work shows that this shift has been the result both of technology that facilitates disintermediated finance as well as regulation that has pushed these activities outside of the traditional banking sector. My  research identifies important tradeoffs in these trends. On one hand, disintermediated finance makes the macroeconomy less exposed to banking crises and the potentially negative aspects of stricter banking regulation. On the other hand, activities increasingly take place in the more opaque shadow banking sector. Additionally, major advantages of vertical integration, such as aligned incentives or cost synergies, are lost.

Fintech and Financial Frictions

My research in this area examines how technology has affected financial intermediation and the limits that it faces. My work begins by pinpointing financial frictions and studying how technology can (or may not) overcome them. For example, does technology enable more accurate screening of borrowers using new data or better models? A major, consistent trend in this work is that the “friction” that the technology addresses is often merely a regulatory barrier, and that primary role of the technology is to aid in regulatory arbitrage. Such is the case in the rise of fintech lenders in the US mortgage industry or tech-enabled money market funds in China. In contexts where the technology is used to address a deeper friction, such as adverse selection in the housing market, fintech has seen only limited success. My work also points to potential limitations in fintech expansion. For example, in the status quo, incumbent banks have monopolistic access to consumer payments data that fintech intermediaries would find useful. I study policies, such as Open Banking, that aim to address these issues.

Regulation and Political Economy

My research in this area examines banking regulation, or financial regulation more broadly, how it interacts with IO and technological trends, as well as questions around the political economy of firms more broadly. Depository institutions face a myriad of complex regulations as well as explicit and implicit government subsidies. My work shows how banking regulations have pushed a significant portion of once-traditional banking activity outside of the regulated banking sector and evaluates how, once disintermediated, further regulation impacts lending in this altered intermediation landscape. A major theme of this work is that bank balance sheet lending is likely much less important to the overall economy than once thought and so concerns about banking regulating hampering lending are likely overstated. Importantly, however, certain sectors still rely on balance sheet lending and non-bank lenders, and so banking regulation can have important distributional effects. Other work in this area studies how political competition impacts aggregate outcomes and shows how, perhaps paradoxically, increased political spending from firms and capital can improve economic outcomes for workers.

Research in Progress

Intermediation
Regulation
Fintech

The Secular Decline of Bank Balance Sheet Lending (2024) (with Gregor Matvos, Tomasz Piskorski, and Amit Seru)  

The traditional model of bank-led financial intermediation, where banks issue demandable deposits to savers and make informationally sensitive loans to borrowers, has seen a dramatic decline since 1970s. Instead, private credit is increasingly intermediated through arms-length transactions, such as securitization. This paper documents these trends, explores their causes, and discusses their implications for the financial system and regulation. We document that the balance sheet share of overall private lending has declined from 60% in 1970 to 35% in 2023, while the deposit share of savings has declined from 22% to 13%. Additionally, the share of loans as a percentage of bank assets has fallen from 70% to 55%. We develop a structural model to explore whether technological improvements in securitization, shifts in saver preferences away from deposits, and changes in implicit subsidies and costs of bank activities can explain these shifts. Declines in securitization cost account for changes in aggregate lending quantities. Savers, rather than borrowers, are the main drivers of bank balance sheet size, Implicit banks’ costs and subsidies explain shifting bank balance sheet composition. Together, these forces explain the fall in the overall share of informationally sensitive bank lending in credit intermediation. We conclude by examining how these shifts impact the financial sector’s sensitivity to macroprudential regulation. While raising capital requirements or liquidity requirements decreases lending in both early (1960s) and recent (2020’s) scenarios, the effect is less pronounced in the later period due to the reduced role of bank balance sheets in credit intermediation. The substitution of bank balance sheet loans with debt securities in response to these policies explains why we observe only a fairly modest decline in aggregate lending despite a large contraction of bank balance sheet lending. Overall, we find that the intermediation sector has undergone significant transformation, with implications for macroprudential policy and financial regulation. 

Intermediation

Agents in Conflict: Vertical Disintegration in Lending (2023) (with Vera Chau and Adam Jorring)  

How does the vertical integration of lender and monitor affect outcomes in credit intermediation and why? While large literature studies conflicts between lender/monitor (agent) and investor (principal), we show theoretically and empirically that conflicts between agents can be more severe and lead to economically significant changes in behavior. Namely, typical monitor incentives are to maintain the status quo against the wishes of the borrower and hypothetical new lender, who prefer ex-post renegotiation or refinance. Vertical integration of the monitor with a lender partially resolves this conflict, but only in cases where the lender is likely to recapture the borrower post-renegotiation, e.g., when competition is low or the borrower is unsophisticated. In the context of residential mortgage refinance, we document a major shift away from vertical integration and show, using a regulatory shock to the cost of vertical integration, that borrowers with vertically integrated monitors are significantly more likely to refinance their mortgages. Vertical integration is most important for borrowers with poor financial access. We build and calibrate a structural model to decompose these effects and examine the ex-ante and ex-post tradeoffs of alternate market structures.

Intermediation
Fintech
Regulation

Customer Data Access and Fintech Entry: Early Evidence from Open Banking (2023, Conditionally accepted at Journal of Financial Economics) (with Tania Babina, Saleem Bahaj, Filippo De Marco, Angus Foulis, Will Gornall, Francesco Mazzola, and Tong Yu) (Slides, Winter 2022)

Open banking (OB) empowers bank customers to share transaction data with fintechs and other banks. 49 countries have adopted OB policies. Consumer trust in fintechs predicts OB policy adoption and adoption spurs investment in fintechs. UK microdata shows that OB enables: i) consumers to access both financial advice and credit; ii) SMEs to establish new fintech lending relationships. In a calibrated model, OB universally improves welfare through entry and product improvements when used for advice. When used for credit, OB promotes entry and competition by reducing adverse selection, but higher prices for costlier or privacy-conscious consumers partially offset these benefits.

Regulation

The Impact of Money in Politics on Labor and Capital: Evidence from Citizens United v. FEC (2023) (with Pat Akey, Tania Babina, and Ana-Maria Tenekedjieva)

We examine whether corporate money in politics benefits or hurts labor using the 2010 Supreme Court ruling Citizens United, which rendered bans on political election spending unconstitutional. In difference-in-difference analyses, affected states experience increases in both capital and labor income relative to unaffected states. We find evidence consistent with increased political spending spurring political competition and the adoption of pro-growth policies. These policies benefit a broader set of constituents as we find a broad-based increase in labor income. Affected states see increased political turnover and reduced regulatory burdens. The economic effects are stronger among ex-ante politically inactive and younger firms.

Intermediation
Fintech

Why is Intermediating Houses so Difficult? Evidence from iBuyers (2022, R&R at Journal of Political Economy) (with Matvos, Piskorski, and Seru) (Slides from NBER CF, Fall 2021)

We study the frictions in dealer-intermediation in residential real estate through the lens of “iBuyers,” technology entrants, who purchase and sell residential real estate through online platforms. iBuyers supply liquidity to households by allowing them to avoid a lengthy sale process. They sell houses quickly and earn a 5% spread. Their prices are well explained by a simple hedonic model, consistent with their use of algorithmic pricing. iBuyers choose to intermediate in markets that are liquid and in which automated valuation models have low pricing error. These facts suggest that iBuyers’ speedy offers come at the cost of information loss concerning house attributes that are difficult to capture in an algorithm, resulting in adverse selection. We calibrate a dynamic structural search model with adverse selection to understand the economic forces underlying the tradeoffs of dealer intermediation in this market. The model reveals the central tradeoff to intermediating in residential real estate. To provide valuable liquidity service, transactions must be closed quickly. Yet, the intermediary must also be able to price houses precisely to avoid adverse selection, which is difficult to accomplish quickly. Low underlying liquidity exacerbates adverse selection. Our analysis suggests that iBuyers’ technology provides a middle ground: they can transact quickly limiting information loss. Even with this technology, intermediation is only profitable in the most liquid and easy to value houses. Therefore, iBuyers’ technology allows them to supply liquidity, but only in pockets where it is least valuable. We also find limited scope for dealer intermediation even with improved pricing technology, suggesting that underlying liquidity will be an impediment for intermediation in the future. 

Intermediation

What do prices imply about market power when contracts are multi-dimensional? We study the U.S. mortgage market, where contracts include both interest rates and upfront fees. We show theoretically that lenders markup fees rather than rates because borrowers can circumvent marked-up rates by refinancing. Empirically, we find that while lenders in more concentrated markets do not charge higher rates, they do charge higher fees. A one-standard-deviation increase in local concentration is associated with between $500 and $800 higher fees (an increase of between 24% and 37%). Our results highlight that regulators may overlook lenders' market power by only considering rates. 

Fintech
Regulation

Fintech as a Financial Liberator (2021) (with Jiayin Hu and Shang-Jin Wei)

An artificially low interest rate on household savings is a common form of financial repression in developing economies and typically benefits incumbent banks. Using proprietary data from a leading Chinese FinTech company, we study Fintech's role in ending financial repression through the introduction of a money market fund with deposit-like features available through an already widely-adopted household payment platform.  Cities and banks whose depositor base is more exposed to FinTech see greater deposit outflows. Importantly, exposed banks respond to FinTech competition by offering competing products with market interest rates. FinTech thus facilitates a bottom-up interest rate liberalization.

Intermediation

Wide or Narrow? Competition and Scope in Financial Intermediation (with Matteo Benetton and Claudia Robles Garcia)

We study the role of scope in financial intermediation. Using new credit registry data on US firms, we show that in the market for small business lending, multi-product banks benefit from economies of scope across products but exploit their market power to steer firms into more profitable, less regulated products. To quantify these forces and the welfare implications of scope, we develop and estimate an equilibrium model of firm credit provision where banks compete with more specialized non-bank financial intermediaries. In counterfactual simulations, we show that market power and bank steering increase prices and reduce welfare for small firms. These losses, however, are less than the gains from cost synergies. We also simulate equilibrium effects of alternative banking regulations. Our results highlight the need for regulation to recognize the multi-product nature of financial intermediaries.

Regulation

Corporate Wrongdoings and the Justice System (with Anat Admati)

Like their employees, corporations in the United States may face civil or even criminal liability when  breaking the law. These penalties, designed to discourage bad behavior, allocate damages, and effect retributive justice, typically take the form of fines, settlement agreements, and even prison for individuals. While a wide array of penalties are available to both private and government litigants, there is little empirical evidence on the form these penalties take---if penalties are imposed at all. In this paper, we assemble a detailed database of corporate wrongdoing and the associated legal consequences to explore who the justice system holds accountable in a corporate context. In particular, we examine how individual and corporate-level punishments depend on the particulars of the law in question, the character, severity, and victim of the harm, and the capacity of the legal system to pursue the claim. In preliminary results, we find that harms to shareholders and to the government---in contrast to employees, customers, or the broader public---are significantly more likely to result in fines and prison. Our ongoing research has important policy implications for regulatory design and the apportionment of legal resources.

Publications and Forthcoming Papers

Intermediation
Regulation

Beyond the Balance Sheet Model of Banking: Implications for Bank Regulation and Monetary Policy (2024, Journal of Political Economy) (with  Matvos, Piskorski, and Seru)

Bank balance sheet lending is commonly viewed as the predominant form of lending. We document and study two margins of adjustment that are usually absent from this view using microdata in the $10 trillion U.S. residential mortgage market. We first document the limits of the shadow bank substitution margin: shadow banks substitute for traditional—deposit-taking—banks in loans which are easily sold, but are limited from activities requiring on-balance-sheet financing. We then document the balance sheet retention margin: banks switch between traditional balance sheet lending and selling loans based on their balance sheet strength, behaving more like shadow banks following negative shocks. Motivated by this evidence, we build and estimate a workhorse structural model of the financial intermediation sector. Banks and shadow banks compete for borrowers. Banks face regulatory constraints but benefit from the ability to engage in balance sheet lending. Critically, departing from prior literature, banks can also choose to access the securitization market like shadow banks. To evaluate distributional consequences, we model a rich demand system with income and house price differences across borrowers. The model is identified using spatial pricing policies of government-sponsored entities and bunching at the regulatory threshold. We study the quantitative consequences of several policies on lending volume and pricing, bank stability, and the distribution of consumer surplus across rich and poor households. Both margins we identify significantly shape policy responses, accounting for more than $500 billion in lending volume across counterfactuals. Secondary market disruptions such as quantitative easing have significantly larger impacts on lending and redistribution than capital requirement changes once we account for these margins. We conclude that a regulatory policy analysis of the intermediation sector must incorporate the intricate industrial organization of the credit market and the equilibrium interaction of banks and shadow banks.

Intermediation
Regulation

Aggregate Lending and Modern Financial Intermediation: Why Bank Balance Sheet Models are Miscalibrated (2023, Prepared for 2023 Macroeconomics Annual) (with  Matvos, Piskorski, and Seru)

Existing macroeconomic models focused on bank balance sheet lending are deficient because they do not account for the modern industrial organization of financial intermediation. Utilizing publicly available micro-level lending data, we investigate two increasingly significant margins of adjustment in credit markets: banks’ ability to sell loans and shadow bank activity. These adjustment margins are substantial and vary across time and regions with different incomes. We examine these margins in a parsimonious dynamic quantitative model featuring banks with balance sheet adjustment through loan sales and shadow banks. Using the calibrated model, we illustrate that these margins significantly dampen the immediate contraction following bank capital shock. Recovery is also faster, because profitable loan sales (e.g., securitization) allow banks to build capital faster and because shadow banks pick up lending slack. Failure to account for adjustment margins leads to significant errors when studying policies which rely on financial intermediation pass-through in the level of aggregate lending, its direction, and composition. Our model highlights the tension between bank balance sheet models and data. The model, which forces total lending to depend strongly on bank balance sheet health, must reconcile the weak correlation between bank capital and aggregate lending. These issues can be reconciled with now available data from bank balance sheets, overall bank lending, and aggregate lending, in conjunction with a model of modern financial intermediation.

Fintech

Financing the Gig Economy (2023, Journal of Finance). Internet Appendix.

Unlike traditional firm production, gig economy workers provide their own physical capital. In consequence, the low-income households for whom gig economy opportunities are most valuable often borrow to participate. In the context of ride-share, a difference-in-difference analysis reveals increased vehicle purchases, borrowing, utilization, and employment around entry, but financially constrained individuals cannot participate. To assess the equilibrium importance of financing, I build and estimate a structural model of the gig economy. Access to finance proves critical for the gig economy's growth: Without finance, equilibrium quantities would be 40% lower, prices 90% higher, and only higher-income households could participate as drivers. 

Regulation

Epidemic Responses under Uncertainty  (2022, Proceedings of the National Academy of Sciences) (with Michael Barnett and Constantine Yannelis)

We examine how policymakers react to a pandemic with uncertainty around key epidemiological and economic policy parameters by embedding a macroeconomic SIR model in a robust control framework. Uncertainty about disease virulence and severity leads to stricter and more persistent quarantines, while uncertainty about the economic costs of mitigation leads to less stringent quarantines. On net, an uncertainty averse planner adopts stronger mitigation measures. Intuitively, the cost of underestimating the pandemic is out-of-control growth and permanent loss-of-life, while the cost of underestimating the economic consequences of quarantine is more transitory.

Intermediation
Fintech
Regulation

Fintech, regulatory arbitrage, and the rise of shadow banks (2018, Journal of Financial Economics, Jensen Award Second Prize) (with  Matvos, Piskorski, and Seru)

Shadow bank market share in residential mortgage origination nearly doubled from 2007 to 2015, with particularly dramatic growth among online “fintech” lenders. We study how two forces, regulatory differences and technological advantages, contributed to this growth. Difference in difference tests exploiting geographical heterogeneity induced by four specific increases in regulatory burden–capital requirements, mortgage servicing rights, mortgage-related lawsuits, and the movement of supervision to Office of Comptroller and Currency following closure of the Office of Thrift Supervision–all reveal that traditional banks contracted in markets where they faced more regulatory constraints; shadow banks partially filled these gaps. Relative to other shadow banks, fintech lenders serve more creditworthy borrowers and are more active in the refinancing market. Fintech lenders charge a premium of 14–16 basis points and appear to provide convenience rather than cost savings to borrowers. They seem to use different information to set interest rates relative to other lenders. A quantitative model of mortgage lending suggests that regulation accounts for roughly 60% of shadow bank growth, while technology accounts for roughly 30%.