In this paper, we establish that universal banks reduce the efficacy of the monetary policy pass-through to the economy. Universal banks have access to a variety of funding sources, beyond retail deposits, which enable them to maintain a higher credit supply when the monetary policy tightens. We show that this has positive real effects on the economy as the higher credit supply by universal banks leads to lower unemployment rates in areas where they lend more. This channel is distinct from existing theories of monetary policy transmission, and we validate that the findings hold beyond a variety of alternative explanations. The results shed new light on the Fed’s execution of monetary policy, as well as how it should regulate the banking system.

Governments regulate household leverage at a national level, even when credit and housing market conditions vary across locations. We document that loan-to-value limits targeting specific neighborhoods can curb local house price growth. We combine administrative data from Taiwan covering the universe of mortgages, personal income tax returns, geocoded housing transactions, and bank balance sheets. Applying matched difference-in-differences and border difference-in-discontinuity designs, we find leverage limits are effective at persistently reducing local house prices in expensive, high-income neighborhoods, without reducing delinquency or inducing mortgage credit rationing. Consumers avoid place-based mortgage restrictions by obtaining inflated appraisals and moving to less regulated areas.

We document the emergence of two distinct types of banks over the past decade: high rate banks which provide deposit rates in line with market interest rates, and low rate banks whose deposits are now even less sensitive to market rates. While the aggregate sensitivity of deposit rates to market interest rates has remained similar, the distribution in deposit rates among large banks is now bimodal. High rate banks operate primarily online with very few physical branches, hold short maturity assets, and earn a lending spread by taking credit risk. In contrast, low rate banks operate far more physical branches, offer deposit rates that are even less sensitive to interest rates than before, and they primarily engage in maturity transformation in that they hold longer duration interest rate sensitive assets, but take less credit risk. Deposits shift substantially towards high rate banks when interest rates rise and reduce the ability of the banking sector to engage in maturity transformation. Tracking aggregate deposit flows from the banking sector thus misses a substantial amount of flows within the banking sector. We argue that the distribution of deposits across high and low rate banks is important to understand the transmission of monetary policy, beyond tracking aggregate deposits in the banking sector. Our evidence is consistent with technological changes in banking that lead to the emergence of high rate banks. In response, traditional banks lower rates through the retention of “stickier” depositors.

We investigate how unconventional monetary policy, via central banks’ purchases of corporate bonds, unfolds in credit-saturated markets. While this policy results in a loosening of credit market conditions as intended by policymakers, we report two unintended side effects. First, the policy impacts the allocation of credit among industries. Affected banks reallocate loans from investment-grade firms active on bond markets almost entirely to real estate asset managers. Other industries do not obtain more loans, particularly real estate developers and construction firms. We document an increase in real estate prices due to this policy, which fuels real estate overvaluation. Second, more loan write-offs arise from lending to these firms, and banks are not compensated for this risk by higher interest rates. We document a drop in bank profitability and, at the same time, a higher reliance on real estate collateral. Our findings suggest that central banks’ quantitative easing has substantial adverse effects in credit-saturated economies.

We investigate how effective was bank supervision before, during, and after the monetary

tightening of 2022. We find that bank supervisors were aware of the interest rate risks that were emerging in the banking system and began downgrading the ratings of banks with significant exposures to such risks as early as the second quarter of 2022. We do not find that bank supervisors were more likely to downgrade banks whose excessive reliance on uninsured deposits posed liquidity risks. Rating downgrades were associated with subsequent declines in exposures to interest rate risks and with increases in bank liquidity. Overall, our evidence supports the idea that regulators made the banking system safer by limiting the interest rate risk exposures and propping up bank liquidity of many banks as the Federal Reserve began raising interest rates in the second quarter of 2022.

We examine the impact of monetary policy transmission on households’ and firms’ long-duration liabilities using high-frequency variation in 10-year swap rates around FOMC announcements. We find that mortgage rates respond about three weeks after monetary policy announcements at which point they move one-for-one with 10-year swap rates, leaving little explanatory power for credit risk, mortgage concentration, or bank market power. Changes in credit risk do materially affect monetary policy transmission into corporate bonds. We show that expected future short rates and movements in convenience yields play a significant role in explaining both mortgage rates and corporate bond yields. Finally, we assess the implications of our findings for banks’ net worth. Outside of unconventional monetary policy interventions, the banking industry is highly exposed to shocks in long-term rates, with bank stocks increasing by 7.91% for every 1% positive surprise to the 10-year swap rate.

Traditionally, fund managers cast votes on behalf of investors whose capital they manage. Recently, this system has come under intense debate given the growing concentration of voting power among a few asset managers and disagreements over environmental and social issues. Major fund managers now offer their investors a choice: delegate their votes to the fund or cast votes themselves ("voting choice"). This paper develops a theory of delegation of voting rights and studies the implications of voting choice for investor welfare. If voting choice is offered because investors have heterogeneous preferences, then investors may retain their voting rights excessively, inefficiently prioritizing their private preferences over information. As a result, investors on aggregate are not always better off if voting choice is offered to them. In contrast, if voting choice is offered to aggregate investors' heterogeneous information, then voting choice is generally efficient, increasing investor welfare. However, if information collection is costly, voting choice may lead to coordination failure, resulting in less informed voting outcomes.

An asset owner designs an asset-backed security and a signal about its value. After experiencing a liquidity shock and privately observing the signal, he sells the security to a monopolistic buyer. Within double-monotone securites, asset sale is uniquely optimal, which corresponds to the most informationally sensitive security. Debt is a constrained optimum under external regulatory liquidity requirements on securities. Thus, the “folk intuition” behind optimality of debt due to its low informational sensitivity holds only under additional restrictions on security or information design. Within monotone securities, a live-or-die security is optimal, whereas additional-tier-1 debt is optimal under the regulatory liquidity requirements.

How efficient is the U.S. patent litigation system? We quantify the extent to which the litigation system shapes innovation using a novel dynamic model, in which heterogeneous firms innovate and face potential patent lawsuits. We show that the impact of a litigation reform depends on how heterogeneous firms endogenously select into lawsuits. Calibrating the model, we find that weakening plaintiff rights through fewer defendant injunctions increases firm innovation and output growth, improving social welfare by 3.32%. Raising plaintiff pleading requirements, which heightens barriers to filing lawsuits, likewise promotes innovation, boosts output growth, and enhances social welfare.

How to incentivize a manager to create value and be socially responsible? A manager can predict how his decisions will affect measures of social performance, and will therefore game an incentive system that relies on these measures. Still, we show that the compensation contract uses measures of social performance when the level of corporate social responsibility preferred by the board exceeds the one that maximizes the stock price. Relying on multiple measures based on different methodologies will generally mitigate inefficiencies due to gaming, i.e. harmonization of social performance measurement can backfire. This has normative implications for the regulation and harmonization of ESG measurement.

The classic Q theory of investment is commonly interpreted to assert that marginal Q, synonymous to the marginal value of capital, is the sufficient statistic for investment. That is because Q-theory is purely demand-based in the sense that variations in investment are fully driven by those in the demand for investment.

This paper provides an exposition of how shocks to the supply of investment drive the joint dynamics of investment and Q. In absence of shocks to the marginal cost of invest- ment (i.e., the supply of investment), shocks to the marginal value of investment (i.e., the demand for investment) determine both equilibrium investment and Q, resulting in a con- ventionally expected monotonic relation along the constant upward-sloping investment supply curve. In presence of non-trivial shocks to the marginal cost of investment, how- ever, there is no longer a one-to-one relation between investment and Q. In essence, Q is to investment as price to quantity in any demand-supply system. This paper theoretically demonstrates that, in a general dynamic model of investment, shocks to the investment demand induce a positive comovement between investment and Q when the marginal cost of investment is monotonically increasing, while shocks to the investment supply induce a negative comovement of investment and Q when investment is sufficiently inelastic to supply shocks. The elasticity of investment to demand and supply shocks critically de- pends on their respective persistence. This paper shows with numerical simulations that the correlation between investment and marginal/average Q critically depends on the rela- tive volatility of and the persistence of supply shocks. A modest level of volatility of supply shocks is able to generate low or even negative correlations between investment and Q.

In summary, one should rethink from an equilibrium view the relation between invest- ment and Q, both of which are simultaneously determined by shocks to both investment demand and supply.

Textbook theory assumes that firm managers maximize the net present value of future cash flows. But when you ask them, the people running large public corporations say that they are maximizing something else entirely: earnings per share (EPS). Perhaps this is a mistake. No matter. We take managers at their word and show that EPS maximization provides a single unified explanation for a wide range of corporate policies involving leverage, share repurchases, cash holdings, and capital budgeting.

To address credit constraints in small-business lending markets, policymakers frequently use loan guarantees, which insure lenders against default. Guarantees affect loan prices by altering the effective marginal cost of lending but may create a moral hazard problem, weakening lenders’ information-acquisition incentives. I quantify these channels using data from the SBA 7(a) Loan Program. Guarantees benefit borrowers, on average, but redistribute surplus from low- to high-risk borrowers. Fixing government spending, an alternative policy with a 50% guarantee and a subsidy leads to an increase in borrower surplus and 0.1 percentage point (1.1%) decline in the program’s default rate.

Pandemic fraud is geographically concentrated and stimulated local purchases with effects on prices, particularly for housing. Fraudulent PPP loan recipients significantly increased their home purchase rate after receiving a loan compared to non-fraudulent PPP recipients, and house prices in high fraud zip codes increased 5.7 percentage points more than in low fraud zip codes within the same county, with similar effects after controlling for other explanations for house price appreciation during COVID. Zip codes with fraud also experience heightened vehicle purchases and consumer spending in 2020 and 2021, with a return to normal in 2022.

Do banks accumulate knowledge about corporate technology, and does it matter for

their lending? To answer this question, we combine corporate innovation with syndicated

loan data. We find that loans to firms sharing similar technologies with banks’

prior borrowers obtain lower loan spreads. We can rule out product market competition,

the value of their technology and ability to innovate, and/or numerous other firm

characteristics as alternative explanations. By estimating a structural bank-borrower

matching model and exploiting the consummation of bank mergers and acquisitions,

we can show that shocks to banks’ technology knowledge causally affect loan spreads.

We build a Markov model of banks' internal loan ratings to illustrate the relationship between ratings inflation and systematic ratings drift. Using administrative data from the Shared National Credit (SNC) Program, we find evidence of systematic downward drift in ratings, consistent with initial ratings inflation. The drift is predictable based on pre-issuance borrower characteristics, suggesting that screening and pricing information is not being fully incorporated into ratings. We use the conditional random assignment of loan examinations to study the causal impact of loan-level supervision on ratings, and find not only that supervision reduces ratings inflation, but also that these effects spill over within a bank's loan portfolio, consistent with learning. We employ our model to investigate various counterfactual capital ratios and provide new insights about the relationship between bank supervision in bank capital cyclicality.

The bank lending channel is heterogeneous across firms. Using matched bank-firm credit data, we develop a framework that estimates the effects of firm-demand and bank-supply credit shocks, allowing for interactions between bank and firm unobserved factors. Bank shocks can have heterogeneous effects across firm types, where firm type is unobserved for the econometrician. We decompose credit growth dynamics into time-varying firm and bank-firm type interaction effects. We uncover significant heterogeneity in the bank lending channel: i) The effect of bank shocks varies considerably across the identified firm types, ii) During the Great Recession, more exposed banks severely contracted their loan supply to some firms but shielded others, iii) We uncover a bank-firm matching channel: the transmission of shocks crucially depends on the bank-firm network, with credit growth dropping by up to 20% in a counterfactual randomly matched network, iii) Accounting for interactions helps to more precisely estimate the impact of bank shocks on firm real outcomes.

We document that in the US residential mortgage market, the share of integrated intermediaries acting as both originator and servicer has declined dramatically. Exploiting a regulatory change, we show that borrowers with integrated servicers are more likely to refinance, and conditional on refinance, are more likely to be recaptured by their own servicer. Recaptured borrowers pay lower fees relative to other refinancers. This trend is partially offset by a rise in integrated fintech originator-servicers, who recapture at higher frequency but at worse terms. We build and calibrate a dynamic structural model to interpret these facts and quantify their impact on equilibrium outcomes. Our model suggests that integreated intermediaries enjoy a marginal cost advantage when refinancing recaptured borrowers, and fully disintegrating them would reduce refinancing frequencies and increase fees. Fintechs use technology to reacquire customers and reduce borrower inertia against refinancing. This endogenously creates market power, which fintechs exploit through higher fees. Despite worse terms ex-post, fintechs increase consumer welfare ex-ante by increasing refinancing frequencies. Taken together, our results highlight the importance of intermediaries' scope in consumer financial outcomes and highlight a novel, quantitatively important application of fintech: customer acquisition.