Working Paper
Natasha R. Sarin. Working Paper. ““The Salience Theory of Consumer Financial Regulation: Evidence from the Regulation of Consumer Payments” ”.Abstract

This article focuses on recent regulation of consumer debit and credit cards and suggests that the most effective regulatory interventions will target products for which banks generate profits above cost (“rents”). Price controls that attempt to force financial institutions to offer products at a price below cost will have distortionary effects, such as increasing other prices or decreasing the availability of valuable products. Because determining what is a rent and what is a cost is complex, I argue that a proxy for bank rents is the lack of salience of a fee/rate to the consumer. Because many consumers are attentive only to fees that are salient to them (such as introductory interest rates on credit cards), financial institutions can easily extract rents on non-salient fees (such as back-end penalty fees or overdraft charges). Therefore, reining in non-salient fees should be a focus for regulators. Behavioral tools such as policy defaults and shocks to consumer attention that make certain non-salient fees salient to consumers will forestall rent extraction.  

Natasha R. Sarin. Working Paper. “The Impact of Paid Leave on Female Employment Outcomes”.Abstract


This paper provides evidence on the impact of job-protected family leave on leave-taking and employment outcomes. I study the impact of a state-level paid leave program in California on (1) new mothers' leave-taking and (2) subsequent labor market outcomes: female employment, hiring, and separations. I exploit the institutional feature the fact that paid leave in California includes job protection only for women who work at firms with 50 or more employees. I find that the increase in leave-taking as a result of California's program is largest for women who work at large firms and thus have access to job protection. Furthermore, it appears that gains for disadvantaged subgroups (less-educated, unmarried, and minority new mothers) exist only for the subsample of women who work at large firms and thus have access to job protection. I then examine the impact of job-protected leave on female employment. Using a difference-in-difference-in-differences approach, I comparing labor market outcomes for women at large versus small firms in California to women at large versus small firms outside of California after the passage of paid leave. I find suggestive evidence that large employers who are forced to offer job-protected leave decrease female hiring by 1.1% in favor of less costly male employees. However, I also find evidence that female separations decrease by 1.5% as a result of access to job-protected leave, so that female employment overall increases slightly. These results provide evidence of both a supply-side and demand-side effect of job-protected leave. Women are both more attached to a labor force that affords them more flexibility after childbirth, but also are more costly to employers if they are likely to take leave to care for newborns. 

Natasha R. Sarin and Vladimir Mukharlyamov. Working Paper. “The Impact of the Durbin Amendment on Banks, Merchants, and Consumers”.Abstract

After the financial crisis, a host of new regulatory interventions focused on protecting consumers and reducing their costs for financial products. Some advocates voiced concern that direct price regulation was unlikely to help consumers, because sophisticated banks "whack-a-mole" regulatory losses. This paper studies this issue using the Durbin Amendment, which capped banks' interchange revenue. We find causal evidence that banks do offset losses by cutting back on other services: Durbin prompts banks to eliminate free-checking, and the availability of this product declines substantially, from 60 percent to 20 percent. We find little evidence that merchants whose interchange expense decreased post-Durbin passed through these savings. However, daily retail gasoline margins demonstrate price pass-through for gas retailers most helped by Durbin. Our results highlight an important case of financial regulation causing unintended consequences for consumer welfare

Divya Kirti and Natasha R. Sarin. Working Paper. “Private Equity Ownership, Risk-Taking, and Performance in the Life and Annuities Industry”.Abstract

Since the Great Recession, there has been a wave of private-equity investments in life and annuities insurance firms. State insurance regulators have raised concerns that private-equity investors face incentives to boost a firm’s near-term returns at the expense of greater risk to long-term performance. In this paper, we argue that private-equity investors increase the risk profiles and returns of life and annuities insurance firms. We assess changes in a firm’s investment behavior and capital management after a private equity investment takes place. We conclude that private-equity-backed insurers substitute away from corporate bonds in favor of investments in asset-backed securities. This substitution coincides with a change in the NAIC regulatory regime that decreased the capital charge assessed on these holdings, allowing firms to take on extra priced-asset risk without incurring corresponding regulatory capital charges.

Natasha R. Sarin and Lawrence H. Summers. Forthcoming. “On Market-Based Approaches to the Valuation of Capital.” Handbook of Financial Stress Testing.Abstract

Market measures suggest banks are as risky as they were in the pre-crisis period. This appears attributable to a decrease in bank franchise value, rather than a byproduct of the current low-interest-rate environment, and cautions about the stability of the financial sector. However, stress-test results reveal little cause for concern; in 2017, all 34 stressed institutions in the United States passed the tests, suggesting they will remain well capitalized in the event of a downturn more severe than the Great Recession. Their passage paved the way for capital disbursements and ignited calls for deregulation. In this paper, we demonstrate that a market-based stress-test approach produces results that are significantly less encouraging than the regulatory tests. While a pure market-based stress test is undesirable, we believe it is important to incorporate market information into the stress-test methodology to facilitate more-credible inferences about bank safety.

Natasha R. Sarin and Lawrence H. Summers. 2018. “Understanding Bank Risk Through Market Measures.” Brookings Papers on Economic Activity .Abstract


Since the financial crisis, there have been major changes in the regulation of large financial institutions directed at reducing their risk. Measures of regulatory capital have substantially increased; leverage ratios have been reduced; and stress testing has sought to further assure safety by raising levels of capital and reducing risk taking. Standard financial theories would predict that such changes would lead to substantial declines in financial market measures of risk. For major institutions in the United States and around the world and midsized institutions in the United States, we test this proposition using information on stock price volatility, option-based estimates of future volatility, beta, credit default swaps, earnings-price ratios, and preferred stock yields. To our surprise, we find that financial market information provides little support for the view that major institutions are significantly safer than they were before the crisis and some support for the notion that risks have actually increased. This does not make a case against the regulatory approaches that have been pursued, but does caution against complacency.


We examine a number of possible explanations for our surprising findings. We conclude that financial markets may have underestimated risk prior to the crisis and that there may have been significant distortions in measures of regulatory capital. While we cannot rule out these explanations, we believe that our findings are most consistent with a dramatic decline in the franchise value of major financial institutions, caused at least in part by new regulations. This decline in franchise value makes financial institutions more vulnerable to adverse shocks. We highlight that the ratio of the market value of common equity to assets on both a risk-adjusted and risk-unadjusted basis has declined significantly for most major institutions. Our findings, if validated by others, may have important implications for regulatory policy.