Bank Risk-Taking and the Real Economy

February 2026, Paper: "During the U.S. housing credit boom, publicly traded banks increased mortgage lending activity and relaxed standards much more than privately held banks. The increase in risk had real effects for a variety of county-level aggregates including employment and consumption. Cross-sectional evidence and a quasi-experiment indicate that the increase in risk stemmed from the institutional ownership and the equity compensation of publicly traded banks, in turn leading banks to place greater weight on short-term equity performance. These results are consistent with the view that a focus on short-term earnings and stock prices amplifies boom–bust credit cycles, in turn leading to real cycles for the aggregate economy."