Abstract: This paper develops a general equilibrium model to examine the role of information technology when intermediaries facilitate the origination and distribution of assets given information asymmetry. Information technology measures the informativeness of asset-quality signals received by intermediaries, who purchase assets produced by originators and then resell them to uninformed investors. Allowing intermediaries to operate has a mixed social welfare effect: Uninformed intermediation can be welfare reducing when adverse selection is severe in the economy, while informed intermediation always improves social welfare.
Discussant: Christine Parlour, University of California-Berkeley
Bernardus Doornik, Bank for International Settlements
Abstract: Regulators around the world increasingly rely on supervisory technologies (SupTech) to support bank supervision. Yet, little is known about how the use of SupTech could affect the banking sector. To address this knowledge gap, we use administrative data from the Central Bank of Brazil to analyze how supervisory actions arising from its SupTech application affect bank balance sheets and lending, and the potential spillover effects to the real economy. We find that the supervisory actions induce banks to reveal inconsistencies in their reported credit risk and to tighten credit
to less creditworthy firms, thereby reducing bank risk-taking. In turn, we find that this credit tightening affects the performance of less creditworthy firms that borrow from affected banks. Further tests suggest that these results are due to a supervisory scrutiny channel, which induces banks to become more prudent. Overall, our findings provide novel insights into the role of SupTech in bank supervision
Emil Verner, Massachusetts Institute of Technology
Abstract: Why do banks fail? We create a panel covering most commercial banks from 1863 through 2023 and study the history of failing banks in the United States. Failing banks are characterized by rising asset losses. Losses are typically preceded by rapid lending growth, financed by non-core funding. Bank failures, including those that involve depositor runs, are highly predictable based on bank fundamentals, even in the absence of deposit insurance and a central bank. We construct a new measure of systemic risk using bank-level fundamentals and show that it forecasts the major waves of banking failures in U.S. history. Altogether, our evidence suggests that failures caused by runs on healthy banks are uncommon. Rather, the ultimate cause of bank failures and banking crises is almost always and everywhere a deterioration of bank fundamentals.
Nicola Cetorelli, Federal Reserve Bank of New York
Bruce Tuckman, New York University
Abstract: In recent years, assets of non-bank financial intermediaries (NBFIs) have grown significantly relative to those of banks. These two sectors are commonly viewed either as operating in parallel, performing different activities, or as substitutes, performing substantially similar activities, with banks inside and NBFIs outside the perimeter of banking regulation. We argue instead that NBFI and bank businesses and risks are so interwoven that they are better described as having transformed over time rather than as having migrated from banks to NBFIs. These transformations are at least in part a response to regulation and are such that banks remain special as both routine and emergency liquidity providers to NBFIs. We support this perspective as follows: (i) The new and enhanced financial accounts data for the United States (“From Whom to Whom”) show that banks and NBFIs finance each other, with NBFIs especially dependent on banks; (ii) Case studies and regulatory data show that banks remain exposed to credit and funding risks, which at first glance seem to have moved to NBFIs, and also to contingent liquidity risk from the provision of credit lines to NBFIs; and (iii) Empirical work confirms bank-NBFI linkages through the correlation of their abnormal equity returns and market-based measures of systemic risk. We conclude that regulation should adapt to this landscape by treating the two sectors holistically; by recognizing the implications for risk propagation and amplification; and by exploring new ways to internalize the costs of systemic risk.
