Research Exchange: July 2023

Selected Outside Research

The Evolution of Competition in the Credit Card Market

This paper presents evidence that the credit card market no longer exhibits characteristics of imperfect competition that were present historically. The analysis shows that “between 1990 and 2008, lenders’ mark-ups decreased by 35 percent, profits shrank by 32 percent relative the average in banking, and prices became nearly 3 times more responsive to cost”, clearly indicating the presence of heightened competition. The paper also extends previous theories of limited competition in credit card lending to explain how market conduct and performance became increasingly competitive despite increasing concentration. The paper argues that “these changes can be explained by considering the role of costly screening in mitigating adverse selection.” Evolution of Competition in the Credit Card Market | Office of the Comptroller of the Currency

Managing Regulatory Pressure: Bank Regulation and its Impact on Corporate Bond Intermediation

This study examines the effects of Basel risk-based capital requirements and balance sheet constraints resulting from the introduction of the Basel leverage ratio requirement on the costs and behavior of bank-affiliated dealers in the U.S. corporate bond market. Exploiting intra-quarter variation in the intensity of the Basel regulatory requirements, the study finds pronounced inventory contractions when regulatory pressure rises near quarter-ends. The analysis demonstrates that bank-affiliated dealers direct their selling pressure primarily to nonbank financial intermediaries, falling back on their customer networks to offload investment-grade bonds and their nonbank dealer networks to dispose of high-yield bonds. The study also finds that regulatory shadow costs can approach 20 percent for balance sheet-intensive trades. The findings “have implications for the design of future regulation of both bank and non-bank financial intermediaries.” Bank Regulation and its Impact on Corporate Bond Intermediation | Federal Reserve Board & Stockholm School of Economics

Sharing the Burden Equally? Intra-Group Effects of Bank Capital Requirements

Despite efforts to also coordinate bank regulation and supervision internationally, as reflected in the Basel capital agreements, for example, heterogeneity across jurisdictions persists. Little is known about how multinational banking groups respond to this heterogeneity, leading to questions around how they internally adjust their capital ratios when faced with stricter capital requirements at the consolidated level. This paper seeks to fill this gap by examining how a policy-induced increase in the regulatory capital ratio affects the capital adequacy composition, lending and risk-taking of the affiliated subsidiaries. Using a combination of bank and loan-level data, the analysis indicates that a banking group facing tighter consolidated capital requirements concentrates its recapitalization efforts at the subsidiary level. In part, the reduction in risk-weighted assets at the subsidiary level is achieved through a reduction in credit supply. This contraction is found to be “more pronounced at subsidiaries that are either relatively small, less profitable or loosely regulated.” Intra-Group Effects of Capital Requirements | KU Leuven and Frankfurt School of Finance and Management

Collateral Damage: Durability Shocks and the Financing of Economically Disadvantaged Consumers

Two distinct approaches to underwriting characterize the auto financing market: asset-based lending, in which the willingness to finance a car is primarily linked to the physical collateral value of the vehicle, and income-based lending, under which the willingness to lend is primarily supported by a car buyer’s income. This paper investigates whether low-income borrowers rely relatively more on ABL or IBL. The main finding is that IBL is particularly important for low-income borrowers, even though these borrowers have limited wages. Moreover, the study demonstrates that this linkage derives from the tendency of lower-income borrowers to purchase assets that depreciate more quickly and have very low liquidation values, even when compared to their income. These findings suggest that “innovations that reduce the cost of monitoring borrower incomes (e.g., automated data links to borrower bank accounts) will likely promote the provision of financing via IBL to lower-income auto purchasers.” Durability Shocks and the Financing of Economically Disadvantaged Consumers | UCLA Anderson School of Business & University of Utah & BI Norwegian Business School

Aggregate Lending and Modern Financial Intermediation: Why Bank Balance Sheet Models are Miscalibrated

This paper investigates how lending responds to a shock to bank capital, focusing on banks’ ability to sell loans and on shadow bank activity. As described in the paper, these two margins of adjustment have become increasingly significant, and they vary across time and regions with different incomes. The analysis relies on a dynamic model featuring both banks, that can make balance sheet adjustments through loan sales, and shadow banks that also engage in lending activities. The model is calibrated using publicly available micro-level lending data. The model demonstrates that responses along these margins significantly dampen the contraction following bank capital shock and induce speedier recovery, because profitable loan sales allow banks to build capital faster and because shadow banks pick up lending slack. Thus, the model helps explain the weak correlation between bank capital positions and aggregate lending activity that has been observed empirically. Aggregate Lending and Modern Financial Intermediation: Why Bank Balance Sheet Models are Miscalibrated | NBER

Impact of Leverage Ratio Relief Announcement and Expiry on Bank Stock Prices

On April 1, 2020, as part of efforts to ease financial market stresses tied to the onset of the COVID-19 pandemic, the Federal Reserve announced that U.S. Treasuries and deposits at Federal Reserve Banks would temporarily be excluded from the calculation of the supplementary leverage ratio. One of the main goals of this temporary easing of banks’ SLR requirement was to increase banks’ ability to provide credit to households and businesses. On March 19, 2021, the Federal Reserve announced that the rule would expire as originally scheduled. This note examines the abnormal stock return around the announcement and expiry of the temporary relief from the SLR to assess the market perception of this relief. The analysis indicates that the relief – and in particular, its announcement – was viewed positively by market participants, and that the magnitude of this stock price reaction was related to the degree to which a firm could be expected to benefit from the relief. Impact-of-leverage-ratio-relief-announcement-and-expiry-on-bank-stock-prices | Federal Reserve Board

Do Fintech Firms Bring Lower Borrowing Costs? Evidence from the U.S. Unsecured Personal Loan Market

This paper presents a comparative analysis of the pricing and terms on unsecured personal loans across fintechs, banks, and credit unions, using data from a consumer credit bureau. Consistent with previous studies, the analysis finds that fintechs generally charge higher interest rates. The analysis further demonstrates that this rate differential is concentrated within the subprime segment and tends to shrink and even reverse as credit scores rise, which the paper argues is likely due to adverse selection of subprime borrowers by fintechs. In addition, the analysis indicates that loans from fintechs are larger and have longer terms. Do Fintech Firms Bring Lower Borrowing Costs? Evidence from the U.S. Unsecured Personal Loan Market | Office of the Comptroller of the Currency

Out of the Office, Into a Financial Crisis

This article discusses the near and medium-term outlooks for the office segment of the commercial real estate market and their implications for banks’ commercial mortgage portfolios. The discussion highlights how weakened demand for office space along with higher interest rates that have reduced commercial real estate values have prompted concerns about rising mortgage defaults. However, loan-to-value ratios of commercial mortgages are generally low, mitigating the risk of default. Commercial lending standards have been fairly conservative in recent years, and the delinquency rate on CRE loans at banks is currently below 1 percent. Whether demand for office space will strengthen depends on whether work-from-home trends begin to reverse, as well as on the macroeconomic outlook. Out of the Office, Into a Financial Crisis? | Richmond Fed

Chart of the Month

Stress Capital Buffer of Selected Banks

Changes in banks’ capital requirements resulting from the 2023 stress tests reflect the continuing volatility of annual stress test outcomes. This chart illustrates the consequences of this volatility for DB and UB. These two banks faced very large increases in their stress capital buffers due to changes to the modeling of PPNR for IHCs. From 2018 to 2022, the projections of PPNR for the IHCs were derived from the industry’s aggregate performance for each revenue and expense component. The Fed switched to individual modeling of PPNR in the 2023 stress tests for five out of the six IHCs, because it now has enough additional time series data for these firms to be modeled individually. Aggregate PPNR for these five firms declined from $20 billion in the previous year’s stress tests to $6.5 billion. This decline in PPNR is likely the primary factor for the deteriorating performance of four out of the five IHCs in the 2023 stress tests, including the very large increases in the stress capital buffers of DB and UBS.

Featured BPI Research

Post-Mortem on the 2023 Stress Tests Results

This post offers some observations about the stress test results released by the Federal Reserve in late June, highlighting significant limitations of these supervisory projections. These limitations contribute to excessive volatility in bank-level results, leading to increased instability in banks’ capital requirements and hindering their capacity to efficiently manage their capital on a year-over-year basis. The discussion emphasizes that a significant overhaul is needed in the way the Federal Reserve generates projections of pre-provision net revenue (PPNR). The current approach, which heavily relies on a bank’s recent performance to determine its performance in stress tests under the severely adverse scenario, undermines the reliability of the results. Moreover, a more robust methodology should be implemented in the projections of certain components of regulatory capital. This would better capture the complexities and unique risk profiles of individual banks, such as the effect of interest rates on unrealized gains and losses on investment securities. Furthermore, because a bank’s performance in the stress tests directly affects its ongoing capital requirement, the Federal Reserve needs to be significantly more transparent about how it projects stress losses and revenues for banks.  Post-Mortem on the 2023 Stress Tests Results – Bank Policy Institute (

Bridging the Gap: How Larger and Mid-sized Banks Power Small Businesses

This note examines the share of small business lending activity by mid-sized and larger banks by county, across U.S. metropolitan and micropolitan areas. These banks play a vital role in local communities, especially as providers of credit to small businesses. However, they are particularly vulnerable to costs imposed by regulation, as they already face considerably higher regulatory burdens compared to community banks and nonbanks. Mid-sized and larger banks combined account for more than half of small business loans (by dollar value) originated in many of the 50 largest metropolitan areas, based on government data. The analysis also shows that small business loans from different size categories of banks tend to be regionally concentrated. In addition, the analysis indicates that the small business lending activity of mid-sized and larger banks tends to be more broadly distributed across counties compared to their deposit holdings. Bridging the Gap: How Larger and Mid-sized Banks Power Small Businesses – Bank Policy Institute (

“Bank On” Transaction Accounts and Financial Inclusion: New Data Shows Continuing Success

This post serves as a follow-up to an earlier post titled “Bank On Transaction Accounts Helped Support Financial Inclusion During the Pandemic,” where the authors explored the transformative role of “Bank On” transaction accounts in fostering financial inclusion in 2020. Examining the most recently available 2021 data from the Bank On program, the authors again find high relative take-up rates for Bank On accounts in areas with predominantly low- or moderate-income (LMI) populations and in neighborhoods with predominantly minority populations. All states experienced substantial growth in Bank On accounts during 2021, with net rates of account opening consistently exceeding 20 percent and mostly exceeding 40 percent. “Bank On” Transaction Accounts and Financial Inclusion: New Data Shows Continuing Success – Bank Policy Institute (

Conferences & Symposiums

Yale Program on Financial Stability Conference
Yale University, New Haven, CT
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8/31/2023 – 9/1/2023
Inflation: Drivers and Dynamics Conference
Federal Reserve Bank of Cleveland and European Central Bank
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9/7/2023 – 9/8/2023
Seventh Annual Fintech Conference
Federal Reserve Bank of Philadelphia
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9/28/2023 – 9/29/2023
22nd Annual Bank Research Conference
Federal Deposit Insurance Corporation Center for Financial Research
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10/4/2023 – 10/5/2023
Community Banking Research Conference
Federal Reserve Bank of St. Louis
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10/6/2023 – 10/7/2023
Ninth Wharton Conference on Liquidity and Financial Fragility
Wharton School of the University of Pennsylvania, Philadelphia
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10/19/2023 – 10/20/2023
New Perspectives on Consumer Behavior in Credit and Payments
Federal Reserve Bank of Philadelphia
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10/19/2023 – 10/20/2023
Federal Reserve Stress Testing Research Conference
Federal Reserve Bank of Boston and Virtual
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10/19/2023 – 10/20/2023
Annual Financial Stability Conference: Interest Rate Variability and the Financial Sector
Federal Reserve Bank of Atlanta
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The 2023 U.S. Treasury Markets Conference
Federal Reserve Bank of New York
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11/16/2023 – 11/17/2023
2023 Financial Stability Conference
Federal Reserve Bank of Cleveland and Office of Financial Research
Cleveland, OH and Virtual
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11/16/2023 – 11/17/2023
2023 Asia Economic Policy Conference
Federal Reserve Bank of San Francisco
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The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and are not intended to be, and should not be construed as, legal advice of any kind.