Essays on financial institutions

This dissertation consists of three empirical studies that examine how disclosure regulation and sustainability-related incentives shape the lending behavior of financial institutions. The first chapter, coauthored with Jacob Ott and Aneesh Raghunandan, examines whether banks’ net-zero proclamations (Net-Zero Banking Alliance participation) lead to shifts in lending behavior. We find that NZBA signatories reallocate lending within brown business groups, increasing loans to clean subsidiaries while cutting loans to the parent and brown subsidiaries, rather than outright divesting. These shifts are not offset by internal reallocations, and NZBA banks reinforce them by charging higher rates to brown subsidiaries than to clean ones. The second chapter, coauthored with Anya Kleymenova and Xi Li, examines the strategic incentives of banks in issuing Sustainability-Linked Loans (SLLs) around the globe. We show that multinational banks, especially dominant players in slowing credit markets, are more likely to introduce SLLs, particularly in economically important foreign markets. Taking leadership roles in SLLs, such as serving as sustainability agents, enables these banks to expand market share by strengthening relationships with existing borrowers and acquiring new clients. Moreover, leading SLLs is associated with future loan growth and higher fee income, highlighting the competitive motives behind sustainability lending. The third paper, which is solo-authored, examines how nonbank loan transparency affects substitution between nonbank and bank credit and, in turn, bank lending. Exploiting California’s Commercial Financing Disclosure Law, I show that standardized APR disclosure increased banks’ share of small business lending, reduced nonbank credit, and increased bank originations. This substitution reflects borrowers shifting away from nonbanks, due to greater sensitivity to loan pricing under standardized disclosure, as well as a contraction in nonbank credit from higher compliance costs. Banks responded by tightening standards, raising markups, and concentrating new lending in counties with higher education, higher numeracy-levels, and lower poverty.