Small Business Lending and Regulation for Small Banks

Since May 2015 several U.S. Bank Holding Companies (BHCs) have been newly classified as small banks by regulators, thus benefiting from a friendlier regulatory capital environment. Using a difference-in-differences setting, we show that less regulation on small BHCs boosts small business lending of the affiliated commercial banks. We employ various tests to demonstrate that these findings are attributable to a capital channel where increases in lending are driven by the preferential capital treatment granted to the small BHC. The regulatory capital relief also has some positive effects for the local economy. Overall, the effects of the regulatory capital relief for small BHCs are consistent with its desired policy objectives. This paper was accepted by Tomasz Piskorski, finance.

Multimarket contact and target size: The moderating effect of market concentration and location

Acquisitions are competitive moves that disrupt an industry’s competitive structure. As a result, firms are often not passive observers of their rival’s acquisitions, but actively retaliate against such competitive moves. In this study, we explore these dynamics by analyzing one way in which multimarket contact may influence acquisition strategies, namely, the type of targets acquired. We contribute to the acquisition literature by clarifying the role that pre-acquisition competitive interdependencies play in firms’ acquisition strategies. Specifically, we suggest that high multimarket contact firms do not necessarily avoid acquisition activity. Instead, these firms are more likely to acquire targets that are less likely to incur retaliation from interconnected rivals. We also explore two important boundary conditions to this relationship: (1) the market’s competitive structure and (2) the location of the target firm. Our empirical tests of a sample of 741 bank holding companies from 1995 to 2014 offer support for our hypotheses.

Resurgence, Part I

The Glass-Steagall Act created a decentralized financial system composed of three separate and independent financial sectors—commercial banking, securities markets, and insurance. The Bank Holding Company Act of 1956 reinforced Glass-Steagall’s policy of structural separation by prohibiting bank holding companies from engaging in any activities that were not “closely related to banking.” Glass-Steagall’s structural barriers prevented the occurrence of systemic financial crises for more than four decades. During that period, federal regulators could deal with problems arising in one financial sector without need to rescue the entire financial system. Despite Glass-Steagall’s success, federal agencies and courts undermined its prudential buffers during the 1980s and 1990s by opening loopholes. Those loopholes allowed banks to convert their loans into asset-backed securities and to offer derivatives that functioned as synthetic substitutes for securities and insurance products. Regulators and courts also allowed money market mutual funds and other nonbanks to issue short-term financial claims that served as deposit substitutes, despite Glass-Steagall’s prohibition against deposit-taking by nonbanks.