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Bank Lending and Firm Financing

Paper Session

Friday, Jan. 4, 2019 2:30 PM - 4:30 PM

Hilton Atlanta, Grand Ballroom C
Hosted By: American Finance Association
  • Chair: Denis Sosyura, Arizona State University

Banks as Patient Lenders: Evidence from a Tax Reform

Elena Carletti
,
Bocconi University
Filippo De Marco
,
Bocconi University
Vasso Ioannidou
,
Lancaster University
Enrico Sette
,
Bank of Italy

Abstract

We test whether the composition of bank funding, and the share of deposit funding in particular, affects bank risk-taking and loan maturity. For identification, we exploit a tax reform in Italy that created incentives for households to hold deposits rather than bank bonds. Using geographically disaggregated data on deposits and securities from securities holdings statistics, we first show that the reform led to larger increases (decreases) in term deposits (bank bonds) in areas where households held more bank bonds prior to the reform. Next, relying on the comprehensive Italian Credit Register, we find that the change in funding led banks to increase the maturity of loans to non-financial firms. Moreover, consistent with theories about the role of the government safety net, we find that the effects on maturity and risk-taking are more pronounced for banks that experienced a larger increase in insured deposits.

Government Ownership of Banks and Corporate Innovation

Bo Bian
,
London Business School
Rainer Haselmann
,
Goethe University
Vikrant Vig
,
London Business School
Beatrice Weder di Mauro
,
Johannes Gutenberg University of Mainz

Abstract

In this paper we analyze the impact of government and private ownership of banks on firm innovation. We find that firms with more financing from government-owned banks are less likely to initiate and more likely to exit innovation. Among the innovators, firms that finance more through private banks successfully apply for a larger number of patents. These findings could be driven by a selection of lending relationships based on firms' preferences to innovate or, alternatively, by the crowding out of innovation due to the presence of government-owned banks. To differentiate between these two alternatives, we use the timing of government-owned bank distress events over the electoral cycle as an instrument. We show a remarkable increase in innovation following an exogenous decrease in government ownership of banks. Moreover, the allocation of credit is more responsive to the funding needs of future innovators amongst private banks, shedding lights on the mechanism. Overall our results suggest that government involvement in the allocation of credit crowds out private banking and comes at the cost of lower corporate innovation.

The Rise of Shadow Banking: Evidence from Capital Regulation

Rustom Irani
,
University of Illinois
Rajkamal Iyer
,
Imperial College London
Ralf Meisenzahl
,
Federal Reserve Board
Jose Luis Peydro
,
ICREA, Pompeu Fabra University, CREI, and BGSE

Abstract

We investigate the connections between capital regulation and the prevalence of lightly regulated nonbanks (shadow banks) in the U.S. corporate loan market. For identification, we exploit an administrative, supervisory credit register of syndicated loans, loan-time fixed effects, and plausibly exogenous variation in regulatory bank capital arising from the U.S. implementation of Basel III. We find that less-capitalized banks reduce loan retention and nonbanks fill the void. Stronger effects exist among loans with higher capital requirements, at times when capital is scarce, and for banks with higher unexpected capital requirements stemming from Basel III. Finally, we document an important consequence of this credit reallocation: loans funded by nonbanks—especially those with fragile funding—experience greater turnover and secondary market price volatility during the 2008 period of marketwide stress.
Discussant(s)
Manuel Adelino
,
Duke University
Mark Leary
,
Washington University-St. Louis
Gregor Matvos
,
University of Texas-Austin
JEL Classifications
  • G2 - Financial Institutions and Services