David S. Scharfstein

Edmund Cogswell Converse Professor of Finance and Banking





  1. The Growth of FInance

    The U.S. financial services industry grew from 4.9% of GDP in 1980 to 7.9% of GDP in 2007. A sizeable portion of the growth can be explained by rising asset management fees, which in turn were driven by increases in the valuation of tradable assets, particularly equity. Another important factor was growth in fees associated with an expansion in household credit, particularly for residential mortgages. This expansion was itself fueled by the development of non-bank credit intermediation (or "shadow banking").   Whether the growth of the financial sector has been socially beneficial depends on one's view of active asset management, the increase in household credit, and the growth of shadow banking. While recognizing some of the benefits of professional asset management, we are skeptical about the marginal value of active asset management. We then raise concerns about whether the potential benefits of increased access to household credit—the main output of the shadow banking system—are outweighed by the risks inherent in this new approach to credit delivery.
  2. Concentration in Mortgage Lending, Refinancing Activity, and Mortgage Rates

  3. Dollar Funding and the Lending Behavior of Global Banks


  4. An Evaluation of Money Market Fund Reform Proposals

    We analyze the leading reform proposals to address the structural vulnerabilities of money market mutual funds (MMFs). We take the main goal of MMF reform to be safeguarding financial stability.  Specifically, MMF reforms should reduce the ex ante incentives for MMFs to take excessive risks and increase the ex post resilience of MMFs to system-wide runs. We argue that requiring MMFs to have capital buffers best accomplishes these goals. Capital provides MMFs with loss absorption capacity, lowering the probability that a MMF suffers losses large enough to trigger a run, and
    reduces ex ante incentives to take excessive risks. Using a methodology that is standard in bank capital regulation, we estimate that a capital buffer of 3% to 4% would reduce the probability of breaking the buck to 0.1%, the threshold commonly used in bank capital models. The riskiness of this capital buffer would be comparable to the riskiness of the long-term debt of an A-rated or BBBrated financial firm. This implies that MMF capital would earn roughly 1.25% more than riskless short-term debt and MMF shareholders would earn 0.05% less in exchange for the protection provided by this capital. In summary, capital buffers would yield significant financial stability benefits, while maintaining the current fixed net asset value (NAV) structure of MMFs. Other leading reform alternatives such as converting MMFs to a floating NAV will be less effective in safeguarding financial stability. In practice, MMFs with a floating NAV would have all of the same vulnerabilities as MMFs have today. Introducing floating NAVs would not alter incentives for risk taking nor would it reduce incentives to run—investors would still attempt to exit early before illiquid assets have to be sold. Thus, we suggest that regulators adopt capital buffers for MMFs.