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  5. Bank Competition/Bank Funding and Risk Management
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Bank Competition/Bank Funding and Risk Management

Paper Session

Sunday, Jan. 5, 2025 8:00 AM - 10:00 AM (PST)

San Francisco Marriott Marquis, Yerba Buena Salon 5 & 6
Hosted By: American Finance Association
  • Toni Ahnert, European Central Bank

Information-Based Pricing in Specialized Lending

Kristian Blickle
,
Federal Reserve Bank of New York
Zhiguo He
,
Stanford University
Jing Huang
,
Texas A&M University
Cecilia Parlatore
,
New York University

Abstract

We study specialized lending in a credit market competition model with private information. Two banks, equipped with similar data processing systems, possess “general” signals regarding the borrower’s quality. However, the specialized bank gains an additional advantage through further interactions with the borrower, allowing it to access “specialized” signals. In equilibrium, both lenders use general signals to screen loan applications, and the specialized lender prices the loan based on its specialized signal conditional on making a loan. This private-information-based
pricing helps deliver the empirical regularity that loans made by specialized lenders have lower rates (i.e., lower winning bids) and better ex-post performance (i.e., lower non-performing loans). We show the robustness of our equilibrium characterization under a generalized information structure, endogenize the specialized lending through information acquisition, and discuss its various economic implications.

CEO Ownership, Risk Management, and Bank Runs at Unlimited Liability Banks during the 1890s

Haelim Anderson
,
Federal Deposit Insurance Corporation
Jaewon Choi
,
Seoul National University
Jennifer Rhee
,
Federal Deposit Insurance Corporation

Abstract

Using unique data on California state banks that were subject to the unlimited liability rule, we examine the relationship between presidential liability, risk management, and bank runs during the panic of 1893. During this period, bank presidents were mandated to hold bank stocks with features resembling restricted stock option and clawback provisions of today. These measures were designed to discourage excessive risk-taking by holding managers personally accountable in the event of a bank failure. We find that banks whose presidents have a greater liability exposure adopt more conservative risk management strategies and are thus less likely to experience bank runs and failures. Our study implies that regulatory policies on bank executives affect the risk management methods and the default risk of banks.

The Effect of Instant Payments on the Banking System: Liquidity Transformation and Risk-Taking

Rodrigo Gonzalez
,
Central Bank of Brazil
Yiming Ma
,
Columbia University
Yao Zeng
,
University of Pennsylvania

Abstract

Instant payment systems have received considerable attention because of their integration with the banking system and their shared functionalities with CBDCs. We show that instant payments may have the unintended consequences of increasing the banking sector’s demand for liquidity and risk-taking incentives. Using administrative banking data and transaction-level payment data from Brazil’s Pix, one of the most widely adopted instant payment systems, we find that banks increased their liquid asset holdings and lent out more subprime and defaulting loans after the adoption of instant payments. We establish the causal relationship by constructing a novel instrument based on passive payment timeouts. These findings arise because the convenience of instant payments to consumers comes at the expense of banks’ ability to delay and net payment flows. The inability to delay payments increases banks’ demand for holding liquid assets over transforming illiquid ones. Banks’ increased holding of liquid and safe assets in turn exacerbates their risk-taking incentives in choosing illiquid assets. Our findings bear important financial stability implications in light of the global surge in adopting instant payment systems, e.g., FedNow in the US.

Discussant(s)
Robert Marquez
,
University of California-Davis
Rodney Ramcharan
,
University of Southern California
Ye Li
,
University of Washington
JEL Classifications
  • G2 - Financial Institutions and Services