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  4. Preliminary Program
  5. Banking and Financial Crises
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Banking and Financial Crises

Paper Session

Sunday, Jan. 3, 2021 12:15 PM - 2:15 PM (EST)

Hosted By: International Banking, Economics, and Finance Association
  • Chair: Evren Ors, HEC Paris

Distracted Institutional Investors and Bank Liquidity Creation

Destan Kirimhan
,
University of South Carolina

Abstract

Excessive bank liquidity creation is an early warning signal of financial crises. This study examines the role of distracted institutional investors in banks in paving the way for financial crises via bank liquidity creation. We employ institutional investor distraction measure developed by Kempf, Manconi, and Spalt (2017). With a sample of publicly listed U.S. banks over the period of 1986-2016, we find that as institutional investors become more distracted, banks create more liquidity on the asset-side and off-balance sheet side. These results are stronger for large banks relative to small banks and are more pronounced during crises and high uncertainty times. The results suggest a previously undiscovered outcome of institutional investor distraction with serious potential consequences for the financial system and real economy.

Reallocating Liquidity to Resolve a Crisis: Evidence from the Panic of 1873

Haelim Anderson
,
Federal Deposit Insurance Corporation
Kinda Hachem
,
University of Virginia and NBER
Simpson Zhang
,
U.S. Office of the Comptroller of the Currency

Abstract

Lawmakers are curtailing the ability of central banks to create emergency liquidity facilities for the shadow banking system. We study how financial stability can be achieved in this newly constrained environment. We show that a forced reallocation of liquidity across banks can achieve fewer bank failures than a decentralized market for interbank loans. Importantly, this reallocation can be implemented through the issuance of clearinghouse loan certificates, such as those issued in New York City during the Panic of 1873. With a new dataset constructed from archival records, we demonstrate that the New York Clearing House issued loan certificates to member banks in the way our model suggests it should have, helping to resolve the panic.

The Impact of Alternative Forms of Bank Consolidation on Credit Supply and Financial Stability

Sergio Mayordomo
,
Bank of Spain
Nicola Pavanini
,
Tilburg University and CEPR
Emanuele Tarantino
,
LUISS, EIEF, University of Mannheim, and CEPR

Abstract

Between 2009 and 2011, the Spanish banking system underwent a restructuring process based on consolidation of savings banks. The program’s design allows us to study how alternative forms of consolidation affect credit supply and financial stability. Compared to bank business groups, we find that bank mergers’ market power produces a contraction in credit supply, higher interest rates, but also a reduction in non-performing loans. We then estimate a structural model of credit demand and supply. We show that short-run welfare gains from improved financial stability outweigh losses from reduced credit supply, while small long-run cost efficiencies generate large welfare increases.

Unexpected Effects of Bank Bailouts: Depositors Need Not Apply and Need Not Run

Allen N. Berger
,
University of South Carolina
Martien Lamers
,
Ghent University
Raluca Roman
,
Federal Reserve Bank of Philadelphia
Koen Schoors
,
Ghent University

Abstract

A key policy issue is whether bank bailouts weaken or strengthen market discipline. We address this by analyzing how bank bailouts influence deposit quantities and prices of recipients versus other banks. Using TARP bailouts, we find both deposit quantities and prices decline, consistent with substantially reduced demand for deposits by bailed-out banks that dominate market discipline supply effects. Main findings are robust to numerous checks and endogeneity tests. However, diving deeper into depositor heterogeneity suggests nuance. Increases in uninsured deposits, transactions deposits, and deposits in banks that repaid bailout funds early suggest some temporary limited support for weakened market discipline.
Discussant(s)
Cindy A. Vojtech
,
Federal Reserve Board
Mark Carlson
,
Federal Reserve Board
Jack Liebersohn
,
Ohio State University
Chris Martin
,
Federal Deposit Insurance Corporation
JEL Classifications
  • G2 - Financial Institutions and Services
  • N2 - Financial Markets and Institutions