Financial Intermediation: Bank Competition
Paper Session
Saturday, Jan. 6, 2024 8:00 AM - 10:00 AM (CST)
- Chair: Isil Erel, Ohio State University
Will Central Bank Digital Currency Disintermediate Banks?
Abstract
This paper studies how introducing a central bank digital currency (CBDC) can affect the banking system. We show that a CBDC need not reduce bank lending unless frictions and synergies bind deposits and lending. We estimate a dynamic banking model to quantify the role of these frictions in shaping the impact of a CBDC on the banking system. Our counterfactual analysis shows that a CBDC can replace a significant fraction of bank deposits, especially when it pays interest. However, a CBDC has a much smaller impact on bank lending because banks can replace a large fraction of lost deposits with wholesale funding. Substitution with wholesale funding makes banks' funding costs more sensitive to changes in short-term rates, increasing their exposure to interest rate risk. We also show that a CBDC amplifies the impact of monetary policy shocks on bank lending.Nonbank Market Power in Leveraged Lending
Abstract
Banks finance their lending to risky firms by selling these loans to nonbank financial institutions. Among these nonbanks, collateralized loan obligations (CLOs) provide the bulk of funds. I show that CLO managers have significant market power during loan origination, which increases firms' cost of borrowing in the leveraged loan market. Akin to bank market power in classic lending relationships which are the result of a bank's ``information monopoly,'' nonbank market power is the result of asymmetrically informed nonbanks. Information asymmetries across nonbanks arise from differential information flows during loan underwriting. Contrary to the underwriting of public securities, banks in general disseminate private information about the borrower when marketing a loan. However, some nonbanks self-restrict their information access to publicly available information. To identify my results, I construct a new instrument using novel data on mergers in the CLO industry. I provide the first analysis of these mergers and their determinants. Overall, this research highlights a key distinction between public and private debt markets and its economic consequences for borrowing firms. My findings have important implications for the ongoing legal debate on the applicability of securities law to leveraged loans.The Rise of Nonbanks and the Quality of Post-Origination Mortgage Servicing
Abstract
We find that as nonbanks' market share increases in a local residential mortgage market, the quality of their post-origination mortgage servicing improves significantly in this market. Two instrumental variable analyses exploiting (1) stress tests conducted by the Federal Reserve, and (2) mortgage industry surety bonds required by each state confirm this finding. Evidence suggests that the quality improvement is likely due to nonbanks' increased specialization in servicing lower-income borrowers and investment in technology. The overall quality of post-origination mortgage servicing provided by all lenders in the local market also improves as nonbanks' market share increases.Discussant(s)
Juliane Begenau
,
Stanford University
Erica Xuewei Jiang
,
University of Southern California
Sergey Chernenko
,
Purdue University
Manasa Gopal
,
Georgia Institute of Technology
JEL Classifications
- G2 - Financial Institutions and Services