This article surveys recent theoretical and empirical advancements on the impact of interest rates on bank valuations and stability—two crucial concerns for financial researchers, policy makers, and regulators. We begin by highlighting the distinctive feature of the regional banking crisis of 2023—the prevalence of liquid assets on bank balance sheets—in contrast to earlier crises such as the savings and loan crisis of the 1980s and 1990s, where illiquid assets contributed to banking failure. In Section 2, we present a theoretical framework that integrates both asset illiquidity and the risk of self-fulfilling solvency runs on the deposit franchise. We show the conditions under which the deposit franchise fails to hedge asset declines due to rising interest rates and demonstrate how and why this amplifies bank fragility. Sections 3–5 explore empirical methods for assessing these effects. We review approaches to measuring the interest rate sensitivity of bank asset values, highlighting their limitations. We also examine recent advances in quantifying bank fragility, particularly the challenges of valuing the deposit franchise under both stable conditions and crisis scenarios. Additionally, we discuss new measures of bank fragility that capture the potential endogenous collapse of franchise value during crises. Applying these measures leads us to conclude that US banks face significant unhedged interest rate exposure in their asset portfolios. When combined with their high leverage, this exposure substantially increases the risk of solvency runs. Liquidity interventions, while useful in the short term, are insufficient for addressing the systemic risks posed by this vulnerability.
Cross-border payments (XBPs), particularly remittances and retail transactions, remain more costly, slower, less accessible, and less transparent than domestic payments. The continued inefficient XBP arrangements, in contrast to the progress made for domestic payments with the use of new technologies and innovative models, reflect that private actors alone cannot overcome the many market failures that hinder XBPs. The most binding constraint concerns limited interoperability, which relates to the multisided market frictions in XBPs and the institutional differences between countries. Ultimately, only proactive and collaborative efforts by the public sector can overcome this constraint. Key priorities are therefore greater harmonization of standards, especially for message transmission, more effective compliance regimes, and promotion of competition.
We review the evidence on the impact of private equity (PE) ownership on firms, stakeholders, and the economy. We organize this literature using a framework that emphasizes the costs and benefits of PE as an ownership form and implies five main predictions: (i) only some firms are natural PE targets; (ii) PE ownership is optimally temporary; (iii) debt is typically a cheaper source of capital than PE equity; (iv) PE activity is strongly cyclical; and (v) the PE model is a second-best response to underlying agency and contracting frictions. We use this framework to interpret existing evidence and to clarify when, and for whom, PE ownership creates value.
This review examines how M&A reshape the creation, diffusion, and ownership of innovation. It treats M&A as one form of boundary choice over innovative assets and people, alongside licensing, alliances, corporate venture capital, minority stakes, inventor mobility, and acqui-hires. Synthesizing evidence from finance, industrial organization, strategy, and sector studies, the review explains why firm boundaries matter for knowledge flows; how innovation shapes who buys whom; and how acquisition markets affect inventive effort, start-up exits, and the build-versus-buy boundary. Post-M&A outcomes are heterogeneous because deals are selected matches and innovation has multiple margins: R&D effort, patenting, novelty, exploration, exploitation, commercialization, diffusion, and human capital reallocation. The review closes by linking property rights and labor market perspectives on inventors, teams, mobility, acqui-hiring, and labor market power and by outlining a policy-relevant agenda.
This article surveys evidence on the evolution of the capital share—the portion of output accruing to firm owners as after-tax profits—and its contribution to asset prices, arguing that capital share risk is a dominant driver of equity values. Using aggregate data on the US corporate sector, we show that the capital share has more than doubled since the late 1980s, driven primarily by a falling labor share. These changes have passed through nearly one-for-one into higher corporate payouts and help explain the long-run divergence between growth in the value of the stock market and real economic activity. Our review summarizes existing research on the measurement and structural consequences of movements in the capital share and outlines open questions about its empirical properties and endogenous links to macroeconomic variables. In sum, capital share risk is essential to understanding asset pricing dynamics in the modern economy.
