Zhao Li, University of International Business and Economics
Abstract: Banks are made of contracts. For a bank to finance productive investment by issuing riskless, money-like claims, its organizational structure (e.g., sole proprietorship, partnership, or public ownership), capital structure, and its bankers' compensation contracts must be jointly designed to induce banker effort and discourage risk-taking. Our model explains why bankers receive high pay for producing mediocre outcomes, and why pure charter value (or market value of equity) is insufficient to prevent banker risk-taking. Outside shareholders, contributing book equity, are useful despite introducing another layer of agency problems. It is efficient for shareholders to create a `big' bank with multiple bankers and their respective projects and finance those projects with joint liabilities. When bankers' incentive contracts are opaque, each banker's pay should depend on the entire bank's performance even though he exerts control only on his own project.
Discussant: Andrew Winton, University of Minnesota
Abstract: Banks expand their branching networks in areas that subsequently exhibit economic growth. But in which direction does causality run? I exploit variation in completion across planned bank branches to disentangle selection and treatment effects of branch entry on local growth. Areas where a bank planned to open a branch, but did not, exhibit higher growth than similar areas (reflecting a selection effect). However, locations where a bank opened a branch only slightly outgrow locations where a bank planned to open a branch but did not (treatment effect). Both effects are limited to the immediate geographic vicinity of proposed branches. These findings contrast with previous studies reporting positive treatment effects of branch entry and instead emphasize banks’ skill in selecting locations poised for growth.
Discussant: Jinyuan Zhang, University of California-Los Angeles
Pulak Ghosh, Indian Insitute of Management-Bangalore
Nirupama Kulkarni, University of California-Berkeley
Manju Puri, Duke University
Abstract: Does the ability to generate verifiable digital financial histories, with customers having data-sharing rights, improve credit access? We answer this using India's launch of an open-banking based public digital payment infrastructure (UPI). Using rarely available data on the universe of consumer loans we show credit increases by both fintechs (new entrants) and banks (incumbents), on the intensive and extensive margin, including increased credit to subprime and new-to-credit customers. We show several mechanisms at play: low-cost internet improves credit access, lenders weigh in digital histories, and digital payments with Open Banking effectively complement first-time bank accountsenabling access to formal credit.
