Competition and Agency Problems Within Banks: Evidence from Insider Lending

This paper studies whether greater competition can mitigate agency problems within banks. We measure the intensity of the agency conflict within a bank by the volume of loans that the bank lends to its insiders (e.g., executives). We first check that these loans are a form of private benefit. By exploiting interstate branching deregulation, we then show that banks react to greater competition by reducing insider lending, especially when the entry of new competitors may more strongly affect bank profitability. Results are robust to using various identification approaches and alternative indicators of agency conflict. We conclude that competitive pressure reduces managerial self-dealing. This paper was accepted by Gustavo Manso, finance.

Bank Branching Deregulation and the Syndicated Loan Market

How do changes in banking regulation affect the syndicated loan market? Because branch networks and loan syndication both enable banks to diversify geographical credit risk, we investigate the staggered implementation of the Riegle–Neal Interstate Branching and Banking Efficiency Act of 1994. Exploiting that the act only changed the legal framework for out-of-state commercial banks, we find that branching deregulation decreased syndicated loan issuance but spurred bilateral lending to corporations. Consistent with a supply-driven substitution effect, this shift is also reflected in interest rate spreads. Our results suggest that changes to banking regulation can substantially alter credit allocation across loan types.

Bank-Branch Supply, Financial Inclusion, and Wealth Accumulation

This paper studies how financial inclusion affects wealth accumulation. Exploiting the U.S. interstate branching deregulation between 1994 and 2005, we find that an exogenous expansion of bank branches increases low-income household financial inclusion. We then show that financial inclusion fosters household wealth accumulation. Relative to their unbanked counterparts, banked households accumulate assets in interest-bearing accounts, invest more in durable assets, such as vehicles, have a better access to debt, and have a lower probability of facing financial strain. The results suggest that promoting financial inclusion for low-income populations can improve household wealth accumulation and financial security.Received April 13, 2017; editorial decision November 14, 2018 by Editor Stijn Van Nieuwerburgh. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

The Effect of Credit Competition on Banks’ Loan-Loss Provisions

Exploiting differential interstate-branching deregulation across contiguous counties of adjacent states, we investigate the effect of entry threat on incumbent banks’ loan-loss provisions. Incumbents exposed to entry threat have offsetting incentives; lower provisions make their loan-underwriting quality appear better, deterring entry, but make local economic conditions appear better, encouraging entry. We find that the incentive to increase apparent loan-underwriting quality dominates on average. We further find that this incentive is stronger in counties with a higher proportion of heterogeneous loans, while the other incentive dominates in counties with both low heterogeneous loans and highly volatile economic conditions.