The 2008 crash has left all the established economic doctrines - equilibrium models, real business cycles, disequilibria models - in disarray. Part of the problem is due to Smith’s "veil of ignorance": individuals unknowingly pursue society’s interest and, as a result, have no clue as to the macroeconomic effects of their actions: witness the Keynes and Leontief multipliers, the concept of value added, fiat money, Engel’s law and technical progress, to name but a few of the macrofoundations of microeconomics. A good viewpoint to take bearings anew lies in comparing the post-Great Depression institutions with those emerging from Thatcher and Reagan’s economic policies: deregulation, exogenous vs. endoge- nous money, shadow banking vs. Volcker’s Rule. Very simply, the banks, whose lending determined deposits after Roosevelt, and were a public service became private enterprises whose deposits determine lending. These underlay the great moderation preceding 2006, and the subsequent crash.

The Economic Institutions of Capitalism

We examine the impact of liquidity shocks by exploiting cross-bank liquidity variation induced by unanticipated nuclear tests in Pakistan. We show that for the same firm borrowing from two different banks, its loan from the bank experiencing a 1 percent larger decline in liquidity drops by an additional 0.6 percent. While banks pass their liquidity shocks on to firms, large firms-particularly those with strong business or political ties-completely compensate this loss by additional borrowing through the credit market. Small firms are unable to do so and face large drops in overall borrowing and increased financial distress.

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Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market

In this study, we examine whether managers delay disclosure of bad news relative to good news. If managers accumulate and withhold bad news up to a certain threshold, but leak and immediately reveal good news to investors, then we expect the magnitude of the negative stock price reaction to bad news disclosures to be greater than the magnitude of the positive stock price reaction to good news disclosures. We present evidence consistent with this prediction. Our analysis suggests that management, on average, delays the release of bad news to investors.

Do Managers Withhold Bad News

Although the modern theory of financial intermediation portrays liquidity creation as an essential role of banks, comprehensive measures of bank liquidity creation do not exist. We construct four measures and apply them to data on virtually all U.S. banks from 1993 to 2003. We find that bank liquidity creation increased every year and exceeded $2.8 trillion in 2003. Large banks, multibank holding company members, retail banks, and recently merged banks created the most liquidity. Bank liquidity creation is positively correlated with bank value. Testing recent theories of the relationship between capital and liquidity creation, we find that the relationship is positive for large banks and negative for small banks. (JEL G21, G28, G32)

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Bank Liquidity Creation

We analyze how corporate venture capital (CVC) differs from independent venture capital (IVC) in nurturing innovation in entrepreneurial firms. We find that CVC-backed firms are more innovative, as measured by their patenting outcome, although they are younger, riskier, and less profitable than IVC-backed firms. Our baseline results continue to hold in a propensity-score-matching analysis of IPO firms and a difference-in-differences analysis of the universe of VC-backed entrepreneurial firms. We present evidence consistent with two possible underlying mechanisms: CVCs’ greater industry knowledge due to the technological fit between their parent firms and entrepreneurial firms and CVCs’ greater tolerance for failure.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1785717_code401772.pdf?abstractid=1364213&mirid=3

Corporate Venture Capital, Value Creation, and Innovation

Low-cost deposits and increased balance sheet liquidity raise banks' supply of illiquid loans more than loans easily sold or securitized. We exploit the inability of Fannie Mae and Freddie Mac to purchase jumbo mortgages to identify an exogenous change in liquidity. The volume ofjumbo mortgage originations relative to nonjumbo origina tions increases with bank holdings of liquid assets and decreases with bank deposit costs. This result suggests that the increasing depth of the mortgage secondary mar ket fostered by securitization has reduced the effect of lender's financial condition on credit supply. LIQUIDITY TRANSFORMATION-THE FUNDING OF ILLIQUID LOANS with liquid deposits has been viewed as a fundamental role of banks. Diamond and Dybvig (1983), for example, argue that banks improve welfare by allowing depositors to diversify liquidity risk while investing in high return but illiquid projects. In recent years, however, securitization has changed the way banks provide liquidity.' While real projects remain illiquid, loans have become more liquid because banks often securitize them, replacing deposits with bonds as a source of finance. Today, more than 60% of outstanding mortgages are securitized. As loans have become more liquid, credit supply has become less sensitive to changes in bank's financial condition. For example, a bank has the option to finance a liquid loan either with deposits or, via securitization, with funds from capital markets. Liquidity provides a substitute source of finance for loan origination because the originator need not hold the loan. In contrast, illiquid loans must be held and thus funded by the originating lender. An increase in the originator's costs of deposits (e.g., from tight monetary policy) could thus restrict the supply of illiquid loans. Many financial assets have been securitized in recent years, with the growth of structured products such as collateralized debt obligations (CDOs),

/pdf/securitization-and-the-declining-impact-of-bank-finance-on-2dqe41ky4c.pdf

Securitization and the Declining Impact of Bank Finance on Loan Supply: Evidence from Mortgage Originations

We analyze how corporate venture capital (CVC) differs from independent venture capital (IVC) in nurturing innovation in entrepreneurial firms. We find that CVC-backed firms are more innovative, as measured by their patenting outcome, although they are younger, riskier, and less profitable than IVC-backed firms. Our baseline results continue to hold in a propensity score matching analysis of IPO firms and a difference-in-differences analysis of the universe of VC-backed entrepreneurial firms. We present evidence consistent with two possible underlying mechanisms: CVC's greater industry knowledge due to the technological fit between their parent firms and entrepreneurial firms and CVC's greater tolerance for failure.

http://www.pbcsf.tsinghua.edu.cn/Upload/file/20150109/20150109150305_4790.pdf

This paper studies the role of securitization in bank management. I propose a new index of “bank loan portfolio liquidity,” which can be thought of as a weighted average of the potential to securitize loans of a given type, where the weights reflect the composition of a bank loan portfolio. I use this new index to show that by allowing banks to convert illiquid loans into liquid funds, securitization reduces banks’ holdings of liquid securities and increases their lending ability. Furthermore, securitization provides banks with an additional source of funding and makes bank lending less sensitive to cost of funds shocks. By extension, the securitization weakens the ability of the monetary authority to affect banks’ lending activity, but makes banks more susceptible to liquidity and funding crisis when the securitization market is shut down.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1659979_code401772.pdf?abstractid=677001&rulid=22794&mirid=5

The Role of Securitization in Bank Liquidity and Funding Management

Mortgage lenders that concentrate in a few markets invest more in information collection than diversified lenders. Concentrated lenders focus on the information-intensive jumbo market and on high-risk borrowers. They are better positioned to price risks and, thus, ration credit less. Adverse selection, however, leads to higher retention of mortgages relative to diversified lenders. Finally, concentrated lenders have higher profits than diversified lenders, their profits vary less systematically, and their stock prices fell less during the 2007--2008 credit crisis. The results imply that geographic diversification led to a decline in screening by lenders, which likely played a role in the 2007--2008 crisis. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

https://www.jstor.org/stable/info/20869277

Elena Loutskina

Papers

Corporate Venture Capital, Value Creation, and Innovation

Securitization and the Declining Impact of Bank Finance on Loan Supply: Evidence from Mortgage Originations

Corporate Venture Capital, Value Creation, and Innovation

The Role of Securitization in Bank Liquidity and Funding Management

Informed and Uninformed Investment in Housing: The Downside of Diversification