Working Papers

Regulatory Capital and Portfolio Investments: Evidence from Life Insurance Companies (Job Market Paper)

I examine how capital requirements affect financial institutions’ portfolio investments by studying life insurers’ portfolio and business decisions. Through a simple model, I show that when regulatory capital becomes cheaper, life insurers may reduce the average investment risk of their portfolios and increase the scale of their insurance business. I test the model using a panel data set of U.S. life insurers and staggered changes in state laws on financial reinsurance that enable the insurers to raise capital more easily. I find that, after these law changes, the insurers significantly reduce their allocation to risky investments and accelerate their annual insurance underwriting growth on average. The effect is more pronounced for insurers that are smaller and less financially competitive. These results provide evidence for the prudential risk management of life insurers and challenge the standard risk-shifting argument for regulated financial institutions.

How Do Fiscal Policies Affect Bank Lending Decisions? Evidence from Mortgage Markets (with Erica X. Jiang)

The conventional thinking is that fiscal policies tend to affect credit supply through the loan demand channel, where banks are largely pass-throughs. With my co-author, Erica X. Jiang, I challenge the completeness of this hypothesis — we study how fiscal policies may directly affect commercial banks’ mortgage lending decisions by exploiting staggered changes in corporate income taxes across U.S. states. We find that the share of jumbo loans in banks’ mortgage originations decreases (increases) by 2.8 (2.4) percentage points for each percentage-point tax increase (cut), after controlling for loan demand. This finding suggests that fiscal policies directly influence bank lending decisions through the funding cost channel. Moreover, we show that although tax increases (cuts) exert no effect on the amount of conforming loan origination, they lead to an increase (decrease) in the average interest rate spread of such loans over the corresponding prime mortgage benchmark rate. This result implies that tighter fiscal policies could lead to higher financial risk borne by the public sector due to banks’ origination of riskier conforming loans.

Work in Progress

Skilled Labor and Anti-takeover Provisions (with Jonathan Cohn)