C. Lattanzio (Job Market Paper) [paper link]

Abstract: This paper studies how interactions between banks and non-banks can exacerbate regulatory arbitrage and affect competition in the loan market. I develop a two-stage game in which a bank and a non-bank first compete for loan origination and then contract on the performance of the resulting portfolios. The bank differs from the non-bank as it can issue government-insured deposits and is subject to capital requirements. Capital requirements are proportional to expected losses and apply to individual exposures, while the deposit guarantee operates at the balance-sheet level. This regulatory asymmetry creates scope for arbitrage. The optimal contract reallocates cash flows away from states in which the rest of the balance sheet performs poorly toward states in which it performs well. I show that contracts such as Synthetic Risk Transfers (SRT), which appear to off-load risk from the banking sector, can instead increase the value of the implicit subsidy from the deposit guarantee. Finally, I show that the optimal contract can expand credit supply, though at the cost of greater rent extraction.

C. Lattanzio (submitted) [paper link]