Financial Sector Profits and Societal Losses
Paper Session
Friday, Jan. 3, 2025 2:30 PM - 4:30 PM (PST)
- Anat Admati, Stanford University
Know Your Customer: Informed Trading by Banks
Abstract
This study analyzes information production and trading behavior of banks with lending relationships. We combine trade-by-trade supervisory data and credit-registry data to examine banks’ proprietary trading in borrower stocks around a large number of corporate events. We find that relationship banks build up positive (negative) trading positions in the two weeks before events with positive (negative) news, even when these events are unscheduled, and unwind positions shortly after the event. This trading pattern is more pronounced when banks are likely to possess private information about their borrowers and cannot be explained by specialized expertise in certain in-dustries or firms. The results suggest that banks’ lending relationships inform their trading and underscore the potential for conflicts of interest in universal banking -a prominent concern in the regulatory debate for a long time. Our analysis also illustrates how combining large data sets can enhance the supervision of markets and financial institutions.MiFID II Research Unbundling: Cross-border Impact on Asset Managers
Abstract
MiFID II requires EU-based asset managers to separate payments for research fromexecution costs in trading commissions. Under this unbundling rule, asset managers
must either explicitly charge research costs to investors or absorb these costs
internally. We model the impact of this regulation and find that it creates a
“pecuniary incentive” for global asset managers to use non-EU client commissions to
subsidize the cost of European research. Supporting this regulatory arbitrage
hypothesis, we provide empirical evidence that the unbundling rule for mutual funds
operating in Europe is associated with an increase in bundled commissions generated
by their U.S. counterparts. Specifically, U.S. funds with an EU twin (an EU-based
fund managed by the same team and following the same investment style) exhibit
higher bundled commissions after the regulation. In turn, EU twins benefit from this
cross-subsidization by achieving higher risk-adjusted returns while maintaining similar
management fees and trading activity. Our findings suggest that agency costs are not
mitigated but merely shifted from more regulated to less regulated markets. We
conclude that effective trading commission disclosure regulation in global financial
markets requires internationally coordinated actions.
Branching Out Inequality: The Impact of Credit Equality Policies in the Non-Bank Era
Abstract
We show that the Community Reinvestment Act (CRA), a major policy aimed at reducing geographic inequality in credit access, can paradoxically widen disparities across regions while enhancing credit equality within certain regions. Banks strategically withdraw branches from lower-income areas to avoid CRA requirements—a response amplified by the expansion of non-bank lenders. We identify banks with higher CRA violation costs using a regression discontinuity design around the CRA eligibility threshold and show these banks retract more branches following non-bank expansion. These branch closures reduce small business lending, financial inclusion, and local economic activity in low-income areas, worsening regional economic disparities.Discussant(s)
Shane Heitzman
,
University of Southern California
Utpal Bhattacharya
,
Hong Kong University of Science and Technology
Mark Egan
,
Harvard University
Julia Fonseca
,
University of Illinois
JEL Classifications
- G2 - Financial Institutions and Services