Laura Nicolae

Banks allocate their portfolios across different types of loans and securities. Changes in capital requirements affect multiple assets’ regulatory penalties simultaneously. Although a large literature finds that stronger capital requirements reduce lending, these bank-level studies generally estimate an aggregate lending elasticity that combines asset-level elasticities with portfolio substitution. Analyzing policies that change the regulatory penalties of individual assets, rather than of individual banks (e.g., raising the risk weight on Treasuries), requires separating these quantities. I develop a new structural framework and empirical method to separate asset-level supply elasticities from portfolio substitution by using changes in bank-level requirements that change multiple assets’ regulatory penalties simultaneously subject to a portfolio adding-up constraint. My method recovers a positive supply elasticity for every asset category and finds that banks’ securities holdings respond more to regulatory costs than loans do. Its predictions match out-of-sample bank portfolio responses to changes in capital regulation. Applying these elasticities to post-crisis capital requirements, I ask whether stronger capital regulation explains banks’ move away from lending since the financial crisis. I show that capital requirements account for a relatively small share of large banks’ shift from lending to securities since 2011.

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.