Finance: Research, Policy and Anecdotes

I have meant to write for a long time about papers I have been reading (and some recently published or accepted in the JBF), so here we go:

The effect of bank failures on small business loans and income inequality, by Salvador Contreras, Amit Ghosh and Iftekhar Hasan, relates to and combines three literatures: bank failures and its negative effects on real economy, SME finance and income inequality, a challenge that economists increasingly care about.  Using variation in the timing and location of branches of failed banks across the U.S. the authors analyse the effect of these failures on income inequality. Employing a difference-in-differences specification they find that bank failures increased the Gini coefficient by 0.3 units (or 0.7%). This rise in inequality is due to a decrease in the incomes of the poor that outpaces declines of the rest of the population. Further, individuals with lower levels of education exhibit a relatively greater decline in real wages and weekly hours worked. One important channel seems to be a general decline in small business loans following bank failures. This in turn reduces net new small business formation and their job creation capacity, a sector that hires a substantial share of low-income earners.

Bob Cull and co-authors study how one specific type of social capital, private social networks, affects access to credit and its implications for consumption, using a sample of Chinese households. They find a strong and likely causal link between private social networks (as measured by the number of siblings of both spouses), households’ use of informal credit, and household consumption. Facing a health shocks, households with private social networks can rely on informal credit via private social networks to maintain household consumption. This is especially relevant for households that do not have access to formal finance, and these effects are more pronounced in poorer regions and in rural areas. An interesting study that points to the importance of informal finance in the absence of formal finance and the role of social networks as underpinning informal finance.

A lot of Covid paper and the impact on and the role of the banking sector have been written over the past three years. Andrea Bellucci and co-authors add an interesting angle, focusing on reallocation effects of the pandemic on venture capital (VC) investments. Specifically, they construct a sample of VC deals that took place in 126 countries around the world from January 2018 till the end of July 2020. They find that with the onset of the pandemic, VCs invest up to 44% more capital in pandemic-related fields (including biology, chemistry and pharmaceuticals, health, healthcare supply chain, and medical science), while the number of deals increases by up to 5.8%. One could argue that these findings speak to the efficiency of the venture capital market, given that this market exists primarily of informed investors with longer time-horizons.

Overview