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Empirical Studies of Bank Regulation and Bank Market Structure

Paper Session

Saturday, Jan. 5, 2019 8:00 AM - 10:00 AM

Hilton Atlanta, 314
Hosted By: Society of Government Economists
  • Chair: Philip Ostromogolsky, U.S. Federal Deposit Insurance Corporation

A Prudential Paradox: The Signal in (not) Restricting Bank Dividends

Levent Guntay
,
MEF University
Stefan Jacewitz
,
U.S. Federal Deposit Insurance Corporation
Jonathan Pogach
,
U.S. Federal Deposit Insurance Corporation

Abstract

We show that, by restricting dividends in the weakest banks, prudential government
regulators will actually induce more capital pay-outs in marginal banks. The potential
for bank runs only exacerbates the incentive to signal strength through dividend
payments. Dividend restrictions can be used to achieve the first-best outcome, but only
if the prevailing capital requirements are sufficiently high. In a crisis, a more restrictive
regulatory dividend policy is optimal, since it allows relatively weak – but solvent –
banks to pool with the strong. Finally, we show that the optimal release of regulatory
bank information depends critically on dividend restriction policies.

Did Deregulation Spawn Regulation? Evidence from the Demise of Old-School Banking

Stefan Lewellen
,
Pennsylvania State University
Emilio Bisetti
,
Carnegie Mellon University
Stephen A. Karolyi
,
Carnegie Mellon University

Abstract

Many studies argue that increased regulation has fundamentally changed the business model of banks, particularly since the financial crisis. We argue that these new regulations are a natural consequence of the prior deregulation of the banking sector. Following deregulation, the increased ability of banks to compete across geographic markets significantly eroded the rents from “old-school banking” (deposit-taking and lending), particularly at small banks. Market power in deposit markets dramatically declined over the past 40 years, and as a result, banks’ net interest margins declined by more than 30% during the same time period. This decline in bank charter values in turn led to three phenomena – increased risk-taking, increased financial innovation, and the rise of the mega-bank – that helped to fuel the financial crisis and spawned the latest wave of regulations. Our results provide a new narrative for the dramatic changes in the banking sector over the past 40 years and challenge the traditional view that regulation hurts small banks.

The Impact of Liquidity Regulation on Bank Mortgage Lending

Lei Li
,
University of Kansas
William F. Bassett
,
Federal Reserve Board
Jose M. Berrospide
,
Federal Reserve Board

Abstract

This paper combines bank balance sheet information with data on geographic mortgage origination from the Home Mortgage Disclosure Act (HMDA) database to explore the impact of the Basel III liquidity coverage ratio (LCR) requirement on the mortgage lending of U.S. Bank Holding Companies (BHCs). Specifically, after controlling for other determi-nants of bank mortgage originations, we study whether the increased holdings of High Quality Liquid Assets (HQLA) reduces the supply of bank mortgages in the U.S. Using balance sheet data between 1997 and 2006 for the sample of BHCs subject to the LCR requirement, we estimate a model of the determinants of LCR which we use to estimate excess HQLA during the post-crisis period. We interpret excess HQLA as the amount of liquid assets resulting from the liquidity requirement, and assess its impact on mortgage lending between 2012 and 2017. We study the evolution of productivity in the banking sector using novel measures of deposit productivity and asset productivity. We begin by characterizing the equilibrium between banks with different levels of productivity in a given local market as a function of market-level demographics. We then study how the local equilibrium evolves by analyzing the determinants of entry and exit and the characteristics of entrants and exitors. Finally, we aggregate our analysis up to the national level to provide a full picture of how the banking sector has evolved over time.

Bank Size, Leverage, and Financial Downturns

Chacko George
,
U.S. Federal Deposit Insurance Corporation

Abstract

I construct a macroeconomic model with a heterogeneous banking sector and an interbank lending market. Banks differ in their ability to transform deposits from households into loans to firms. Bank size differences emerge endogenously in the model, and in steady state, the induced bank size distribution matches two stylized facts in the data: bigger banks borrow more on the interbank lending market than smaller banks, and bigger banks are more leveraged than smaller banks.

I use the model to evaluate the impact of increasing concentration in US banking on the severity of potential downturns. I find that if the banking sector in 2007 was only as concentrated as it was in 1992, GDP during the Great Recession would have declined by much less than it did, and would have recovered faster.
Discussant(s)
Stefan Lewellen
,
Pennsylvania State University
Philip Ostromogolsky
,
U.S. Federal Deposit Insurance Corporation
Chacko George
,
U.S. Federal Deposit Insurance Corporation
Lei Li
,
University of Kansas
JEL Classifications
  • G2 - Financial Institutions and Services