Abstract: We study optimal capital regulation in a dynamic banking model with non-maturing deposits. Capital regulation addresses banks' incentive to dilute non-withdrawing depositors but preserves some dilution to reduce bank defaults in downturns. We analyze the time inconsistency problem of capital regulation. Commitment has a first-order effect on the level of capital requirements. We examine how capital regulation stringency changes across different countries around the 2008 global financial crisis and document novel facts that are consistent with our theory.
Discussant: Tetiana Davydiuk, Johns Hopkins University
Priyank Gandhi, Rutgers, The State University of New Jersey
Amiyatosh Purnanandam, University of Michigan
Abstract: We document a three-fold increase in average pairwise correlation in bank equity returns after the global financial crisis, a pattern that is absent in non-bank financials or non-financial rms. We tease out one key economic channel behind the increased similarity: stress-test regulations that incentivize banks to make similar portfolio decisions. The increase in similarity is especially strong for smaller stress-tested banks such as regionalbanks. The stress-tested banks increase their exposure to a factor that is orthogonal to the factors that enter the stress test scenario. Our findings raise concerns about "too-many-to-fail" risk in response to model-based regulations.
Discussant: Basil Williams, Imperial College London
Emil Verner, Massachusetts Institute of Technology
Abstract: This paper studies the impact of voluntary climate commitments by banks on their lending activity. We use administrative data on the universe of bank lending from 19 European countries. There is strong selection into commitments, with increased participation by the largest banks and banks with the most pre-existing exposure to high-polluting industries. Setting a commitment leads to a marked boost in a lender’s ESG rating. Lenders reduce credit in sectors they have targeted as high priority for decarbonization. However, climate-aligned banks do not change their lending or loan pricing differentially compared to banks without climate commitments, suggesting they are not actively divesting. We can reject that climate-aligned lenders divest from mining firms by more than 0.37% and from firms in targeted sectors by more than 2.7%. Firm borrowers are no more likely to set climate targets after their lender sets a climate target, which casts doubt on active engagement by lenders. These results call into question the efficacy of voluntary commitments.
