Nicholas Trachter, Federal Reserve Bank of Richmond
Derek Wenning, Indiana University
Abstract: We study the spatial expansion of banks in response to banking deregulation in the 1980s and 90s.
During this period, large banks expanded rapidly, mostly by adding new branches in new locations, while many small banks exited. We document that large banks sorted into the densest markets, but that sorting weakened over time as large banks expanded to more marginal markets in search of locations with a relative abundance of retail deposits. This allowed large banks to reduce their dependence on expensive wholesale funding and grow further. To rationalize these patterns we propose a theory of multi-branch banks that sort into heterogeneous locations. Our theory yields two forms of sorting. First, span-of-control sorting incentivizes top firms to select the largest markets and smaller banks the more marginal ones. Second, mismatch sorting incentivizes banks to locate in more marginal locations, where deposits are abundant relative to loan demand, to better align their deposits and loans and minimize wholesale funding. Together, these two forms of sorting account well for the sorting patterns we document in the data.
Discussant: Emilio Bisetti, Hong Kong University of Science & Technology
Mehdi Beyhaghi, Federal Reserve Board of Governors
Cooper Howes, Federal Reserve Bank of Kansas City
Gregory Weitzner, McGill University
Abstract: In classic theories of financial intermediation, banks mitigate information frictions by monitoring and producing information about borrowers. However, it is difficult to test these theories without being able to observe banks' private information. In this paper, we use supervisory data containing banks' textit{private} assessments of their loans' expected losses. We show that changes in expected losses predict firms' future stock returns, bond returns and earnings surprises. The predictability is concentrated among small firms and growth firms, and only occurs when banks become more pessimistic. Using within-firm variation in borrowing across banks, we identify sources of private information for banks and show that this information affects banks' credit allocation decisions. Our findings show that banks' information production and monitoring create an information advantage over financial markets, even among publicly traded firms.
Discussant: Michael Gallmeyer, University of Virginia
Abstract: Public goods are non-rivalrous (consumption by anyone does not reduce the supply to anyone else) and non-excludable in that anyone can consume the public good. An important supplier of public goods are municipalities. We develop a model of optimal financing of municipal public goods or infrastructure, , that rests on two primary economic forces: the elasticity of the tax base with respect to taxes and services, and the process for resolving financial distress. We show how municipalities determine optimal financing, highlighting legal structures governing financial distress, state-by-state variation in allowance of workouts under bankruptcy law, and the pro-creditor leaning of courts. We show that municipalities that issue safe debt, for either political or behavioral reasons, decrease overall welfare.
Discussant: Dermot Murphy, University of Illinois-Chicago
