Regulation & Finance
Friday, Jan. 3, 2020 8:00 AM - 10:00 AM (PDT)
- Chair: Philipp Schnabl, New York University
Arbitrage Capital of Global Banks
AbstractThe role of unsecured short-term wholesale funding for global
banks' operations has changed significantly in the post-crisis regulatory
environment. We show that global banks mainly use unsecured wholesale
funding to finance persistent near risk-free arbitrage positions post-crisis,
in particular, the interest on excess reserves arbitrage and the covered
interest rate parity arbitrage. Under this business model, we examine
the effects of a large negative wholesale funding shock for global
banks as a result of the U.S. money market mutual fund reform implemented
in 2016. We find that the primary response of global banks to the
reform was a cutback in arbitrage positions that relied on unsecured
funding, rather than a reduction in loan provision. Furthermore, we
examine the relationship between arbitrage capital and arbitrage profits.
Price Regulation in Two-Sided Markets: Empirical Evidence from Debit Cards
AbstractThis paper studies the impact of price regulation in two-sided markets, where intermediaries must get both sides of the market on board. Since platforms such as debit card networks can only succeed by simultaneously convincing consumers to use cards and merchants to accept them, they often subsidize one side of the market to generate supracompetitive profits from the other side (Rochet and Tirole 2003). Using a novel dataset on card processing fees, we show a regulation restricting banks’ ability to charge high processing fees (the Durbin Amendment of the 2010 Dodd-Frank Act) transferred value from the previously subsidized side of the market—consumers—to merchants. Our evidence adds empirical support to the concern that market failures in two-sided markets are hard to identify, and potentially even harder regulate.
Price Regulation in Credit Markets: A Trade-Off between Consumer Protection and Credit Access
AbstractInterest rate caps are widespread in consumer credit markets, yet there is limited evidence on its effects on market outcomes and welfare. Conceptually, the effects of interest rate caps are ambiguous and depend on a trade-off between consumer protection from banks’ market power and reductions in credit access. We exploit a policy in Chile that lowered interest rate caps by 20 percentage points to understand its impacts. Using comprehensive individual-level administrative data, we document that the policy decreased transacted interest rates by 9%, but also reduced the number of loans by 19%. To estimate the welfare effects of this policy, we develop and estimate a model of loan applications, pricing, and repayment of loans. Consumer surplus decreases by an equivalent of 3.5% of average income, with larger losses for risky borrowers. Survey evidence suggests these welfare effects may be driven by decreased consumption smoothing and increased financial distress. Interest rate caps provide greater consumer protection in more concentrated markets, but welfare effects are negative even under a monopoly. Risk-based regulation reduces the adverse effects of interest rate caps, but does not eliminate them.
Harvard Business School
London School of Economics
- G2 - Financial Institutions and Services