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We investigate the connections between bank capital regulation and the prevalence of lightly regulated nonbanks (shadow banks) in the U.S. corporate loan market. For identification, we exploit a supervisory credit register of syndicated loans, loan-time fixed effects, and shocks to capital requirements arising from surprise features of the U.S. implementation of Basel III. We find that less-capitalized banks reduce loan retention, particularly among loans with higher capital requirements and at times when capital is scarce, and nonbanks step in. This reallocation is associated with important adverse effects during the 2008 crisis: loans funded by nonbanks with fragile liabilities are less likely to be rolled over and experience greater price volatility.

We study the credit supply effects of the unexpected freeze of the European interbank market, using exhaustive Portuguese loan-level data. We find that banks that rely more on interbank borrowing before the crisis decrease their credit supply more during the crisis. The credit supply reduction is stronger for firms that are smaller, with weaker banking relationships. Small firms cannot compensate the credit crunch with other sources of debt. Furthermore, the impact of illiquidity on the credit crunch is stronger for less solvent banks. Finally, there are no overall positive effects of central bank liquidity, but higher hoarding of liquidity.

The regulation of bank capital as a means of smoothing the credit cycle is a central element of forthcoming macro-prudential regimes internationally. For such regulation to be effective in controlling the aggregate supply of credit it must be the case that: (i) changes in capital requirements affect loan supply by regulated banks, and (ii) unregulated substitute sources of credit are unable to offset changes in credit supply by affected banks. This paper examines micro evidence—lacking to date—on both questions, using a unique data set. In the UK, regulators have imposed time-varying, bank-specific minimum capital requirements since Basel I. It is found that regulated banks (UK-owned banks and resident foreign subsidiaries) reduce lending in response to tighter capital requirements. But unregulated banks (resident foreign branches) increase lending in response to tighter capital requirements on a relevant reference group of regulated banks. This \"leakage\" is substantial, amounting to about one-third of the initial impulse from the regulatory change.

The use of accounting measures and disclosures in banks' contracts and regulation suggests that the quality of banks' financial reporting is central to the efficacy of market discipline and nonmarket mechanisms in limiting banks' development of debt and risk overhangs in economic good times and in mitigating the adverse consequences of those overhangs for the stability of the financial system in downturns. This essay examines how research on banks' financial reporting, informed by the financial economics literature on banking, can generate insights about how to enhance the stability of the financial system. We begin with a foundational discussion of how aspects of banks' accounting and disclosures may affect stability. We then evaluate representative papers in the empirical literature on banks' financial reporting and stability, pointing out the research design issues that empirical accounting researchers need to confront to develop well-specified tests able to generate reliably interpretable findings. To this end, we provide examples of settings amenable to addressing these issues. We conclude with considerations for accounting standard setters and financial system policy makers.

We show that negative policy rates affect the supply of bank credit in a novel way. Banks are reluctant to pass on negative rates to depositors, which increases the funding cost of highdeposit banks, and reduces their net worth, relative to low-deposit banks. As a consequence, the introduction of negative policy rates by the European Central Bank in mid-2014 leads to more risk-taking and less lending by euro-area banks with a greater reliance on deposit funding. Our results suggest that negative rates are less accommodative and could pose a risk to financial stability, if lending is done by high-deposit banks.

New bank equity must come from somewhere. In general equilibrium, raising bank capital requirements means either that banks produce less shortterm debt (as debt holders must become shareholders), or short-term debt is not reduced and the banking system acquires nonbank equity (as the shareholders in nonbanks become shareholders in banks). The welfare effects involve a trade-off because bank debt is special as it is used for transactions purposes, but more bank capital can reduce the chance of bank failure (producing welfare losses).

This paper studies how financial inclusion affects wealth accumulation. Exploiting the U.S. interstate branching deregulation between 1994 and 2005, we find that an exogenous expansion of bank branches increases low-income household financial inclusion. We then show that financial inclusion fosters household wealth accumulation. Relative to their unbanked counterparts, banked households accumulate assets in interest-bearing accounts, invest more in durable assets, such as vehicles, have a better access to debt, and have a lower probability of facing financial strain. The results suggest that promoting financial inclusion for low-income populations can improve household wealth accumulation and financial security.

Relative to quantitative methods traditionally used in accounting and finance, textual analysis is substantially less precise. Thus, understanding the art is of equal importance to understanding the science. In this survey, we describe the nuances of the method and, as users of textual analysis, some of the tripwires in implementation. We also review the contemporary textual analysis literature and highlight areas of future research.

We explore the impact of supervision on the riskiness, profitability, and growth of U.S. banks. Using data on supervisors' time use, we demonstrate that the top-ranked banks by size within a supervisory district receive more attention from supervisors, even after controlling for size, complexity, risk, and other characteristics. Using a matched sample approach, we find that these top-ranked banks that receive more supervisory attention hold less risky loan portfolios, are less volatile, and are less sensitive to industry downturns, but do not have lower growth or profitability. Our results underscore the distinct role of supervision in mitigating banking sector risk.

We present an economic model of systemic risk in which undercapitalization of the financial sector as a whole is assumed to harm the real economy, leading to a systemic risk externality. Each financial institution's contribution to systemic risk can be measured as its systemic expected shortfall (SES), that is, its propensity to be undercapitalized when the system as a whole is undercapitalized. SES increases in the institution's leverage and its marginal expected shortfall (MES), that is, its losses in the tail of the system's loss distribution. We demonstrate empirically the ability of components of SES to predict emerging systemic risk during the financial crisis of 2007–2009.