The role of FinTech in small business lending

In view of tightening bank regulations, there has been growing concern that traditional banks may not be able to offer a wide enough range of products to meet small and medium-sized enterprises’ (SMEs’) financing needs. Could FinTech platforms, not subject to similar regulatory capital requirements, complement the banking system and provide SMEs access to bank credit? In this study, Professor Huan Tang exploits administrative and commercial datasets on the French SME lending market and unveils a mechanism called the “collateral channel”: SMEs use the junior unsecured loans from FinTechs to acquire assets that they then pledge to banks as collateral. Between 2014 and 2019, this phenomenon allowed French SMEs to increase their bank credit by 20% following a FinTech loan origination.

The threat of AI collusion

The integration of algorithmic trading and reinforcement learning, known as AI-powered trading, has fundamentally reshaped the structure of capital markets. Amid the rapid adoption of this technology, financial regulators have directed their attention toward understanding how Artificial Intelligence can potentially compromise competition and market efficiency. Here, Professors Itay Goldstein and Winston Dou contribute to this debate by providing a model of imperfect competition among informed speculators with asymmetric information to explore the implications of AI-powered trading strategies on informed traders’ market power and price informativeness. Their results demonstrate that informed AI traders can collude and generate substantial profits by strategically manipulating low order flows, even without explicit coordination that violates current antitrust regulations.

Does investor expertise add value to renewable power projects?

The United States has overcome the high fixed costs of clean energy development by providing extensive tax incentives to attract private investors. Often, direct project sponsors do not have enough taxable income to fully use these credits, so they turn to “tax equity” investors with high taxable income, typically large banks. In this study, Professor Daniel Garrett investigates whether and how tax equity investors add value to renewable power projects. Using a sample of 529 solar and wind plants from 2006-2022, he finds that projects with tax equity are built faster and produce 5% closer to capacity. Through two natural experiments, the study demonstrates that this greater efficiency is due to monitoring or up-front contracting by tax equity investors and not merely to project selection.

The importance of commitment to capital regulation policies

Skewed business cycles

During recessions, the distribution of the growth rate of firm-level outcomes has been extensively characterized by a negative impact to the mean (on average, firms grow less) and a positive shock to the variance (more uncertainty). Using firm-level panel data from the United States and almost fifty other countries, Professor Sergio Salgado goes one step further and details the impact of recessionary shocks to the skewness of the distribution. His findings suggest that the distribution’s skewness is strongly procyclical, meaning that during economic downturns, a subset of firms does extremely badly (creating a large left tail of negative growth rates). Furthermore, Professor Salgado observes that firms internalize this phenomenon when determining their expectations about future sales growth. At the onset of the COVID pandemic, before all the decline in sales realized, firms expected the median sales growth to remain close to zero but significantly declined their expectations at the bottom of the distribution. This striking observation suggests that firms do not perceive recessions as periods in which sales will decline on average, but in which if things go badly, they will go really badly for the firm.