I test theories of the recent financial crisis by studying how banks’ pre-crisis investments connect to their CEOs’ beliefs. Using different proxies for beliefs, I find banks with larger housing investments and worse crisis performance had CEOs who were more optimistic ex ante. Banks with the most optimistic CEOs experienced 20 percentage points higher real estate loan growth, and 15 percentage...

This paper presents evidence that reductions in mortgage interest rates associated with prepayment penalties are greater for riskier borrowers, as measured by mortgage type, credit scores, and local incomes and education levels. This is consistent with an efficiency view that, by reducing the reclassification risk faced by lenders, prepayment penalties can be welfareimproving. Additional findin...

This paper provides a unified analysis for the onset of the 1998 financial crisis and the strong economic recovery afterward in Russia and other former Soviet Union countries. Before the crisis a banking failure arose owing to the coexistence of a lemons credit market and high government borrowing. In a lemons credit market low credit risk firms switched from bank to nonbank finance, including ...

A string of theoretical papers shows that the non-exclusivity of credit contracts generates important negative contractual externalities. Employing a unique dataset, we identify how these externalities affect the supply of credit. Using internal information on a creditor’s willingness to lend, we find that a creditor reduces its credit supply when a borrower obtains a loan at another creditor (...

We assess the impact of the geographic expansion of bank assets on the cost of banks’ interestbearing liabilities. Existing research suggests that expansion can both intensify agency problems that increase funding costs and facilitate risk diversification that decreases funding costs. Using a newly developed identification strategy, we discover that the geographic expansion of banks across U.S....

This paper presents a theoretical analysis of strategic competition in retail banking when some of the ®rms show expense preference behavior. The literature on expense preference behavior by banking ®rms is fairly large, but to our knowledge, so far, the strategic interaction between pro®t maximizing banks and banks with expense preference behavior has not been investigated. The paper has also ...

The paper surveys theories of the intertemporal allocation of funds through demand deposits and anonymous markets, ...rst separately and then in an integrated model. It reviews some work on the role of market frictions and asset characteristics, and suggests that the interplay between these two is crucial in explaining the observed coexistence of demand deposits and anonymous markets. JEL class...

This article explains why the collective determination of interchange fees in payment platforms and in ATM networks can lead to ine¢ ciencies in the substitution between payment cards and cash. If the issuers are ATM owners, I show that the pro…t maximising interchange fees re‡ect the trade-o¤ that banks make between the pro…ts on foreign withdrawals and the possibility to save the costs of cas...

Margins in international banking have fallen dramatically during the last years. Therefore, banks face the pressing need to develop more suitable forms of organization and more efficient incentive schemes. In a principal agent framework this paper develops four fundamental rules. The marginal benefits from additional risk taking should be equal to its marginal cost. The top management should se...

This paper investigates how financial weakness among Japanese banks in the second half of the 1990s was reflected in pricing in the financial markets. Two indicators, the Japan premium (JP) and the stock price spread (SP)}deviation between the bank stock index (BINDEX) and stock price index excluding banks (NINDEX)}were examined. The structural change occurring in the relationship between BINDE...