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  3. 2021
  4. Preliminary Program
  5. Bank Fragility
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Bank Fragility

Paper Session

Monday, Jan. 4, 2021 3:45 PM - 5:45 PM (EST)

Hosted By: American Finance Association
  • Chair: Amiyatosh Purnanandam, University of Michigan

Direct Lenders in the United States Middle Market

Tetiana Davydiuk
,
Carnegie Mellon University
Tatyana Marchuk
,
BI Norwegian Business School
Samuel Rosen
,
Temple University

Abstract

A shortage in credit supply by traditional lenders following the 2007-2008 Financial Crisis has contributed to a surge of direct lenders and, in particular, business development companies (BDCs). Using a novel hand-collected dataset, we provide the first systematic analysis of the BDC sector. In a difference-in-differences setting, we exploit three exogenous shocks to credit supply - new regulations for banks and the collapse of a major finance company - to establish that BDC capital acts as a substitute for traditional financing. We further document that access to BDC funding has stimulated local economic growth using an instrumental variable approach.

Micro-Evidence from a System-Wide Financial Meltdown: The German Crisis of 1931

Kristian Blickle
,
Federal Reserve Bank of New York
Markus Brunnermeier
,
Princeton University
Stephan Luck
,
Federal Reserve Bank of New York

Abstract

This paper studies a major financial panic, the run on the German banking system in 1931, to distinguish between banking theories that view depositors as demanders of liquidity and those that view them as providers of discipline. Our empirical approach exploits the fact that the German Crisis of 1931 was system-wide with cross-sectional variation in both deposit flows and bank distress and took place in absence of a deposit insurance scheme. We find that interbank deposit flows predict subsequent bank distress early on. In contrast, wholesale depositors are more likely to withdraw from distressed banks at later stages of the run and only after the interbank market has started to collapse. Retail deposits are---despite the absence of deposit insurance---largely stable and are only withdrawn at the height of the crisis when all deposit flows have become generally uninformative in line with withdrawal decisions being panic-driven and independent of a specific bank's fundamentals. Our findings emphasize the heterogeneity in depositor roles, with discipline being best provided through the interbank market.

Bank Heterogeneity and Financial Stability

Itay Goldstein
,
University of Pennsylvania
Alexandr Kopytov
,
University of Hong Kong
Lin Shen
,
INSEAD
Haotian Xiang
,
Peking University

Abstract

We investigate the stability of a financial system featuring interconnected fragile banks. In our model, banks face a risk of bank runs and have to liquidate long-term assets in a common market to repay runners. Liquidation prices are depressed when many banks sell their assets at the same time. When bank assets are homogeneous, their selling behaviors are synchronized, and the feedback loop between bank runs and asset fire sales is exacerbated. We show that differentiating banks to some extent enhances the stability of all banks, even those whose asset performance ends up being weaker. Our analyses provide important insights about the regulation of banking sector's architecture and the design of government support during crises.
Discussant(s)
Daniel Weagley
,
Georgia Institute of Technology
Yiming Ma
,
Columbia University
Andrey Malenko
,
University of Michigan
JEL Classifications
  • G2 - Financial Institutions and Services