Research

I analyze how bail-in policies affect banks of different sizes and risk profiles using a structural model of balance sheet decisions with endogenous exit and entry estimated to U.S. data. Banks differ in loan risk and can influence their size, key factors shaping the likelihood of bailouts and bail-ins. When bail-ins replace bailouts, large banks face higher funding costs, eroding the benefits of size. Riskier banks slow their growth, reducing the share of big banks by 42% and their failure rate by 65%. Aggregate lending falls only 3.3%, while welfare rises 0.66% as improved bank stability outweighs reduced credit availability.

In March 2020, the Federal Reserve’s Corporate Credit Facilities abruptly lowered effective bond financing costs for investment-grade firms. We test whether this shock increased cash acquisitions following bond issuance. Using firm-level Compustat–CRSP–FISD–SDC data from 2017–2023 and a triple-difference design, we find no evidence of increased acquisition rates for treated IG issuers, but we find higher announcement CARs, suggesting more selective dealmaking.

Bank credit line commitments account for 60% of bank commercial loan portfolios. Using confidential supervisory data, we document heterogeneity in borrower drawdown behavior driven by interest rate changes. Banks manage liquidity risks by reducing lending to rate-sensitive borrowers when rates decline and adjusting loan pricing and terms accordingly. The results have implications for liquidity regulation, which focuses primarily on liability-side risks.