We empirically show that adverse selection is a key determinant of banking market structure. Using newly-constructed panel data on all US bank branches over the 1981-2016 period, we study banks' decisions to expand or contract geographically. First, we show that banks are more likely to expand...

How can we design safe financial institutions, and how should we efficiently resolve them? We study these questions by empirically analyzing the failure of a derivatives central clearing counterparty (CCP) in Paris in 1974. First, we identify the risk management failures that caused the default...

Financial markets and labor markets are linked: aggregate employment and stock market indices co-move positively and their volatility is comparable. While existing search-and-matching models perfectly capture the relative magnitude of these volatilities (Pissarides' law), they fail in predicting...

Empirically, bank equity value is decreasing in the interest rate. Yet (i) many banks do not hedge interest rate risk and (ii) above 50% of hedging banks use derivatives to increase exposure. We model a bank's capital structure, and show that these facts are consistent with optimal hedging under...

This paper surveys the theoretical and empirical literature on interest rate risk in banking. Theoretically, it considers the origins of interest rate risk and its allocation. Interest rate risk is non-diversifiable and does not originate from the banking sector, but from the potential time...

I argue that one rationale for central clearing counterparties (CCPs) is to mitigate inefficiencies associated with distressed asset sales. First, I build a simple model where asset sales give rise to multiple equilibria, and show that a contract resembling a CCP ensures coordination on the...

This paper proposes a network formation model of an OTC derivatives market where both prices and quantities are bilaterally negotiated. The key feature of the framework is to endogenize the network of exposures, the gross and net notional amounts traded and the collateral delivered through...

We use an extensive data set of bilateral exposures on credit default swap (CDS) to estimate the impact on collateral demand of new margin and clearing practices and regulations. We decompose collateral demand for both customers and dealers into several key components, including the "velocity...

We use an extensive data set of bilateral exposures on credit default swap (CDS) to estimate the impact on collateral demand of new margin and clearing practices and regulations. We decompose collateral demand for both customers and dealers into several key components, including the “velocity...