Laura Nicolae

A large literature finds that bank capital requirements reduce lending, but these studies generally estimate lending responses to regulations that change required equity for multiple bank assets simultaneously. For example, a 1-percentage-point increase in a bank’s risk-based capital requirement raises the required equity on risk-weight-1 loans by 1 percentage point and on risk-weight-0.2 securities by 0.2 percentage points. Evaluating counterfactual policies that impose a new pattern of equity requirements across assets, such as changing a single asset’s risk weight, requires estimating the response of an asset’s supply to its own regulatory cost while holding other assets’ costs fixed. I develop a portfolio-allocation model and empirical method to estimate asset-level supply elasticities using changes in bank-level capital requirements. The model uses the fact that portfolio shares sum to one to separate each asset’s response to its own regulatory cost from portfolio substitution. I recover positive supply elasticities for every asset category, with securities holdings responding more to regulatory costs than loans do. Applying these elasticities to post-crisis requirements, I ask whether capital regulation explains large banks’ shift from lending to securities. Capital regulation accounts for about 28% of the aggregate shift toward securities and 35% of the cross-sectional convergence in large banks’ average asset risk weights 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.