Abstract: We examine credit supply during a repo run. Lenders initially relax lending terms upon an initial bad signal about the borrower’s creditworthiness. Lenders with a greater exposure to the borrower and a closer lending relationship intervene faster and show a longer period of patience, and so do lenders whose loans are backed by more illiquid assets. The initial credit relaxation is consistent with lenders having an incentive to prolong the borrower’s life. Other loan terms (price and maturity) remain stable, pointing to the central role of collateral in dynamically managing risk exposure.
Discussant: Brittany Lewis, Washington University-St. Louis
Sergio Correia, Federal Reserve Board of Governors
Stephan Luck, Federal Reserve Bank of New York
Emil Verner, Massachusetts Institute of Technology
Abstract: What causes bank failures? We create a panel covering most commercial banks from 1863 through 2023 and study the history of failing banks in the United States. We document that failing banks are characterized by rising losses resulting from realized credit risk. Credit losses are typically preceded by rapid lending growth, financed by non-core funding. These systematic patterns in failing banks imply that bank failures can be predicted with a high degree of precision, even in the absence of deposit insurance, a central bank, and a wider safety net. We construct a new measure of elevated systemic risk using micro-data on bank-level fundamentals and show that it forecasts the major waves of banking failures in U.S. history. Altogether, our evidence suggests that the ultimate cause of bank failures is almost always and everywhere related to a deterioration of bank fundamentals.
Abstract: Bank branch density, defined as the number of bank branches to total deposits, has significantly declined over the past decade, fueled by a confluence of branch closings and the almost doubling of deposits between 2016 and 2022. During this period, banks with low branch density benefited from large deposits inflows, leading to even lower density. But the virtuous cycle of deposits growth in these banks stopped spinning when investors became wary about their financial health. Stock prices of banks with low branch density plummeted during the 2023 Banking Crisis as these banks experienced larger outflows of uninsured deposits. Our results suggest that digital banking enabled banks to grow faster and attract uninsured deposits, but those large deposits inflows took the form of “hot money” that changed its course when economic conditions worsened.
Discussant: Erica Xuewei Jiang, University of Southern California
