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.
Discussant: Robert Marquez, University of California-Davis
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.
Discussant: Rodney Ramcharan, University of Southern California
Abstract: We show that the introduction of instant payments may have the unintended consequences of constraining liquidity transformation and incentivizing risk-taking by banks. 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 the use of instant payments led to an increase in banks’ liquid asset holdings and a rise in their share of defaulting loans. 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, lowers their profitability per unit equity, and exacerbates their risk-taking incentives. 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: Thomas Eisenbach, Federal Reserve Bank of New York
