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  2. ASSA Annual Meeting
  3. 2027
  4. Preliminary Program
  5. Regulation of Financial Institutions
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Regulation of Financial Institutions

Paper Session

Sunday, Jan. 3, 2027 8:00 AM - 10:00 AM (EST)

Westin DC Downtown
Hosted By: American Finance Association
  • Chair: Sascha Steffen, Frankfurt School of Finance and Management

Credit Crunch in Housing under Regulation Q

Pauline Liang
,
Stanford University

Abstract

I document the role of a credit crunch in driving the housing market in the 1970s. Binding Regulation Q ceilings tightened funding and induced a credit crunch across the financial sector. I show that the crunch was particularly severe in housing because the primary mortgage lenders, savings and loan associations (S&Ls), lacked the funding flexibility banks had. Commercial banks could substitute rate-capped retail deposits with wholesale funds exempt from the ceiling, whereas S&Ls could not. My empirical strategy uses cross-sectional differences in deposit composition across institutions and historical reliance on S&Ls across local areas to identify the impact of Regulation Q on trends in the housing market. At the local level, a 1 pp tightening in the effective S&L ceiling is followed over the next year by a 4.7 pp drop in the mortgage growth rate and a 1.1 pp drop in the real house-price growth rate. Effects through banks are muted. The results are consistent with a downward shift in the home buyers' demand curve. Binding ceilings reduce mortgage credit. Households cut back on home purchases, and both housing quantities and prices fall. This mechanism complements macro explanations and helps to explain the joint boom-bust patterns in prices and quantities in the housing market during this era.

Payout Restrictions and Bank Risk-Shifting

Fulvia Fringuellotti
,
Federal Reserve Bank of New York
Thomas Kroen
,
International Monetary Fund

Abstract

This paper studies the effects of regulatory payout restrictions on bank risk-shifting. Using policies imposed during the Covid-crisis on US banks as a natural experiment and a high frequency differences-in-differences approach, we show that, when payouts are restricted, banks' equity prices fall while their debt values appreciate. Moreover, banks that are ex-ante more exposed to the payout restrictions decrease risk-taking in lending relative to less exposed banks and similarly curb risk-taking in other segments of their balance sheets. Consistent with a risk-shifting channel, these effects revert once restrictions are lifted. These results indicate that payout and risk-taking choices are complementary and that regulatory payout restrictions endogenously affect bank risk-shifting.

Mitigating the Risks of Deregulation: The Role of Supervisory Attention

Elena Carletti
,
Bocconi University
Filippo De Marco
,
Bocconi University
Alberto Manconi
,
Bocconi University
Isabella Wolfskeil
,
Federal Reserve Board

Abstract

We study how regulation and supervision interact to affect bank risk. Exploiting the 2018-2019 U.S.~bank deregulation, we show that mid-sized banks subject to relaxed liquidity requirements experienced a deterioration in liquidity. At the same time, using confidential data from the Federal Reserve on supervisory hours, we document that these banks were subject to more intense supervision, with in an increase in examination activity. Our evidence suggests that the increase in supervisory intensity mitigates the liquidity deterioration. These effects are stronger in districts where supervisors oversee fewer banks and have longer tenure. These results underscore the complementary roles of regulation and supervision, and suggest that preserving supervisory capacity can enhance the resilience of the banking system.

Bank Liquidity Regulation and the Growth of Private Credit

Sebastian Doerr
,
Bank for International Settlements
Gaston Gelos
,
International Monetary Fund
Vesa Pursiainen
,
University of St. Gallen

Abstract

We study the role of bank liquidity regulation in the growth of private credit. Following the introduction of the liquidity coverage ratio (LCR), private credit increases significantly more in U.S. counties where banks subject to the LCR or where LCR-banks with a greater initial liquidity shortfall had a larger footprint. Our estimated effect of the LCR on private credit growth is comparable in economic magnitude to that of the capital shock from stress tests. The relationship between LCR footprint and private credit is stronger in industries that are more reliant on credit.

Discussant(s)
Vrinda Mittal
,
University of North Carolina-Chapel Hill
Florian Heider
,
Goethe University Frankfurt
Emil Verner
,
Massachusetts Institute of Technology
Franz Hinzen
,
Dartmouth College
JEL Classifications
  • G2 - Financial Institutions and Services