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FIIE-8: Financing innovations and funding
Financial Inclusion, Human Capital, and Wealth Accumulation: Evidence from the Freedman's Savings Bank
1Arizona State University, United States of America; 2University of Chicago, United States of America
Financial inclusion may have important effects on human capital and business investment, as well as wealth accumulation. This paper studies how improved access to financial services among a previously unbanked group affects human capital, labor market, and wealth outcomes. We match 1870 census records to novel data from the Freedman's Savings Bank, a bank created after the American Civil War to serve recently emancipated slaves and other free Blacks. Families with accounts are more likely to have children in school, be literate, work, and have higher occupational income and real estate wealth. We employ an instrumental variables strategy exploiting the staggered rollout of bank branches, comparing individuals who lived near branches built prior to 1870 with those who lived near branches planned—but still unbuilt—as of 1870. We find African-Americans’ outcomes differ with proximity to built branches, but not to planned branches, and do not find branch proximity effects among Whites. Overall, our evidence suggests significant positive effects of financial inclusion.
Completing Markets with Contracts: Evidence from the First Central Clearing Counterparty
1HEC Paris, France; 2CEPR
I study the real effects a contracting innovation that suddenly made financial markets more complete: central clearing counterparties (CCPs) for derivatives. The first CCP to provide full insulation against counterparty risk was created in Le Havre (France) in 1882, in the coffee futures market. Using triple difference-in-differences estimation, I show that central clearing changed the geography of trade flows Europe-wide, to the benefit of Le Havre. Inspecting the mechanism using trader-level data, I show that the CCP was instrumental both to mitigate adverse selection issues and to solve a ``missing market'' problem. Increased risk-sharing possibilities enabled more gains from trade to be realized. The successful contractual innovation quickly spread to new exchanges.
Are risky banks rationed by corporate depositors?
1Goethe University Frankfurt; 2Deutsche Bundesbank; 3New York University - Stern School; 4Frankfurt School of Finance and Management
We analyze auctions of unsecured money market deposits of firms to banks via a FinTech intermediary. In each auction, only the firm observes the banks and their interest rate bids and decides where to deposit its funds. We observe that deposit interest rate bids increase monotonically with banks’ risk and that firms in general prefer higher deposit interest rates. However, our results show that firms’ selection of banks in which to deposit is concave in the bid interest rate in line with the general notion of credit rationing as modeled in Stiglitz and Weiss (1981). We find this confirmed on the intensive as well as on the extensive margin. Risky banks eventually exit the market, and re-enter when their risk decreases again in the long term. Relatedly, we observe that risky banks exit when the interest rate they have to offer increases above the interest rate charged by the central bank. This has important implications for banks’ access to unsecured corporate funding, central bank liquidity provision and the understanding of deposit markets as well as FinTech in general.
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