Laura Nicolae

Banks allocate their portfolios across different types of loans and securities. A large literature finds that stronger capital requirements reduce bank lending, but these studies generally estimate the total bank-level response to a change in regulation that shifts multiple assets’ regulatory costs simultaneously. Evaluating counterfactual policies that impose a different pattern of regulatory penalties across assets from those observed in the data requires a model of how an asset’s supply responds to its own regulatory cost versus how it responds to those of other assets. I develop a structural framework and empirical method to estimate asset-level supply elasticities separately from portfolio substitution. I use changes in bank-level requirements that change the regulatory penalties of different assets by different amounts, while the model’s portfolio adding-up constraint links each asset’s supply response to the regulatory penalties of all other assets. My method recovers positive supply elasticities for every asset category, with securities holdings responding more to regulatory costs than loans. Its predictions match out-of-sample bank portfolio responses to changes in capital regulation. Applying these estimates to the post-crisis strengthening of capital regulation, I argue that stronger capital requirements account for about 28% of large banks’ shift from lending to securities since 2011.

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In Belgium, nearly all employees’ wages are indexed to inflation. Firms are grouped into longstanding labor agreements that determine the exact timing and frequency at which wages are indexed, e.g. every year versus every month. Using firm-level administrative data, we leverage the resulting variation in real wages across firms to estimate the employment response. We find that employment contracts by 0.4% over four quarters for each 1% increase in wages. This result is robust to including NACE sector-date fixed effects and to using only variation in firms’ indexation timing, controlling for their chosen indexation frequency. About one-third of the response comes via anticipation of future wage increases. The elasticity is more than twice as large in magnitude in the post-pandemic period than before it, suggesting strong nonlinearities. Overall, these results show that, by preventing inflation from reducing real wages, inflation indexation reduces employment.

As revealed by the failures of three regional banks in the spring of 2023, bank runs are not a thing of the past. To inform the ongoing discussion of the appropriate regulatory response, we examine trends in the banking industry over the last twenty-five years. On the liability side of bank balance sheets, deposits—and especially uninsured deposits—have grown rapidly. On the asset side, there has been a notable shift away from the information-intensive lending traditionally associated with banks and towards longer-term securities such as MBS and long-term Treasuries. These trends appear to be related, in the sense that banks with the most rapid growth in deposits have seen the biggest declines in loans as a share of assets. Thus, while the banks that failed in early 2023 were arguably extreme cases, they reflect broader trends, especially among larger banks. We construct a simple model to help assess the main regulatory options to reduce the risk of destabilizing bank runs—expanding deposit insurance and strengthening liquidity regulation—and argue that the industry trends we document favor the latter option. Using the model, we offer some design considerations for modifying the Liquidity Coverage Ratio so as to require banks to pre-position sufficient collateral—largely in the form of short-term government securities—at the Federal Reserve’s Discount Window to ensure they have enough liquidity to withstand a run on their uninsured deposits. We also comment briefly on some other regulatory implications of our findings, including for interest rate risk regulation and merger policy.