information technology, Meta Intelligence

Digitizing Heritage: Exploring the Transformation of Culture to Data

[from India in Transition by the Center for the Advanced Study of India at the University of Pennsylvania, 1 September 2025]

by Krupa Rajangam & Deborah Sutton

“Oh that. We just took some undergraduate history students on board as interns. They provided the content and it was done.”

The co-founder of a digital heritage initiative promoting interactive user interfaces offered these opening remarks. Speaking at a Delhi-based museum, he had been asked about the information provided to users as they moved their hands across an interactive board, revealing images and narratives relating to the Indian freedom movement. His response clarified that the physical and digital components of such installations—for example, the 3D-modeling software and hardware, scanning equipment and its resolution and the user interface—were more carefully designed and calibrated than the content they provided.

Contemporary cultural heritage (CH) is rife with digital innovation. The COVID pandemic accelerated this transformation as archivists and curators worked to develop content that would reach remote, locked-down audiences. Within significant limits, digital platforms can democratize and facilitate access to materials previously inaccessible. Instead of being physically siloed, digitized material—as data components and not just content on culture—can be reproduced, combined, and circulated infinitely to achieve a reach previously considered impossible. Accessibility and malleability remain one of the great boons of digital formats. But here, we consider the information economy of CH practice as it exists—and not its extraordinary and often hypothetical potential—in two, overlapping realms of digitized CH: for-profit business enterprises and academic side-hustles, related to more mainstream academic research.

In the former, questions of what is shared are often less significant than the appeal of the format. In the latter, innovation is often the result of short-term projects that languish, abandoned after project completion, and rarely find audiences. Our research builds on our individual experiences and the findings of a scoping exercise examining a number of India-based heritage projects conducted in 2021-22. It suggests the need for more careful consideration of the implications of transforming CH materials into forms of data; the change impacts everything from how we understand “originality” to the reliance on for-profit services to deliver heritage material to the public.

As digitized representations of CH and access to such formats become more widespread, are we, as CH practitioners and academics, giving enough thought to how digital technologies are reshaping the nature of CH and its audience? Beyond questions of wider reach, are we sufficiently acknowledging how these changes challenge a continued focus on originality and notions of academy as primary controllers of access to knowledge and its validity, both in research and practice?

Digitizing for Dissemination

In 2019, one of us—Deborah Sutton—developed a software platform, Safarnama, including an app and authored experiences around Delhi’s CH. The project subsequently extended to Karachi. Generating “original” content, such as audio-visual clips and old photos, to be hosted on the app platform, was key to its attractiveness and usefulness, but permissions proved tricky. Some collaborators who were initially keen to contribute content quietly withdrew, likely due to the unfamiliar format and unknown reach. The app format also raised other questions. Would incorporating content from non-digital but published scholarship require authorial permission or only acknowledgement?

In 2020, Krupa Rajangam held a sponsored incubation at the NSRCEL, a business incubator located at the Indian Institute of Management-Bangalore, to develop a web interface that would host geo-locationed stories of marginalized histories by drawing on both historical facts and lived experiences. Corporate mentors remained skeptical of her ability to source “original” content on an ongoing basis, i.e., content that was both authenticated and validated. They repeatedly advised her to focus on the format, user experience, and appeal for “mass markets” so her prototype would find audiences. Both projects equally raised questions over who would consume the content and what constitutes the public or audience.

In a scoping exercise undertaken for the Arts and Humanities Research Council (AHRC), UK, in 2021-22, we explored a number of India-based heritage projects funded by the AHRC in partnership with the Newton Fund and Indian Council for Historical Research, since 2015 (figure 1). We were particularly interested in the digital components, which all projects included, even if only a website.

Our exploratory surveys firmly established the divergence in interpreting both CH and digital technologies, which was not surprising. Some projects defined and treated CH as fixed pre-existing material, to be interpreted and presented to audiences through digital technologies. Others re-framed digital formats of CH as components of data, assembling, manipulating, and representing extant archival and other materials. The rest generated digitized CH, effectively altering its nature. Typically, such projects dealt with more ephemeral or less conventional forms of CH.

Fundamental Transformations

Notions of originality remain central to art, architectural and art historical training, and CH practice. Digitization transforms the access and retrieval value of “original” material in physical archives, such as old maps and letters, much lauded in traditional “analog” scholarship, to use value as data. Once the end-user (audience) accesses this data (whether historical facts or stories), it becomes nothing more than bytes occupying valuable space, to be deleted once consumed rather than stored, making it easy to overlook or disregard the source and its context.

For example, in the Safarnama project, the app contained carefully collected and authenticated narratives on “partition memories” in Delhi and Karachi. However, the bite-sized media format meant that users would only explore content once, as snippets. This realization led the team to develop the software and incorporate the ability to download content, which at least meant that users could collect, organize and store (archive) the assembled media.

Digitization also takes away the materiality of the archive, making it more ephemeral. Non-digital materials through, and into which we render CH can (in endless combinations and cycles) be lost, forgotten, sold, recovered, collected, displayed, and stored. Such capacities of digital files are obvious, but maintaining access depends on varied and dynamic software ecologies for existence and sustained end-user access. Digital files created within one software-architecture can be incompatible with, and therefore rendered obsolete, by another. The ethos of software development is constant change.

In another paper, we examined questions of quantity, quality, and reusability of data related to digitization of building-crafts knowledge alongside CARE and FAIR principles of data management. The principles were proposed and adopted by an international consortium of scholars and industry, the former focused on responsible collection, use, and dissemination of data, especially related to vulnerable people and the latter on sustainable data management.

As an example, one AHRC project experimented with methods to capture detailed 3D images of heritage sites and structures in dynamic crowded environments. They used one set of methods to capture the interiors and another for the exteriors, hoping to merge both together and develop holistic imagery for audiences. This proved impossible at first due to issues of software compatibility. Once that was partially resolved, the new software couldn’t handle the sheer volume of data captured—and it was unclear where and for how long such volumes of data would be stored.

New realms of intellectual property remain fuzzy. While the content on digital platforms is governed by licensing and proprietary legal frameworks, it is often hosted on open platforms, through web repositories such as GitHub. Prima facie, such openness appears to challenge the proprietorial nature of archives and other repositories as keepers of knowledge. However, it raises a host of questions about how to maintain a critical understanding of archives.

Digitization may, and should, transform access but should it obliterate the regimes through which the materials were generated and organized and what’s included or excluded? For example, a local coordinator of one project that engaged with artists commented that digital technologies are typically used to document technical skills as forms of intangible heritage and develop artist encyclopedias, saying that “they are hardly used to interrogate the reality that many ‘traditional’ artists hail from marginalized castes.” Similarly, the local coordinator of another project that engaged with communities living in and around a protected heritage site commented on how digital technologies often end up being used to create a record of heritage structures without any reference to their day-to-day setting.

Any and all digital enterprise in CH, we argue, needs to integrate the ambition to use digital methods to not just present but also counter and interrogate the material, its creation, and purpose. Digital platforms and web- and app-based software are now able to manipulate and re-situate information in unprecedented ways. The novelty of such formats can displace original, provocative, and timely considerations of the material. Often, we are so taken by the visual and structural attributes of these formats, that we accept it at face value and lose sight of the tone and content of heritage as a curated message about the past and the present.

Alongside this, digital augmentations and iterations of CH, including storage, have significant financial and infrastructural implications. The creation and maintenance of digital platforms requires either developing “in-house” digital specialization or, more commonly, reliance on private, for-profit platforms. Paying for external provision introduces complexities. Funders, including the AHRC, struggle to devise guidance or policy in relation to software licensing. However, a persistent challenge to projects, and partnerships between academic and non-academic partners, is devising data and software strategies that subsist beyond the life of the funded-research project. Often, the adverse effects of the paucity of longer-term planning around IP issues, sustainability, and data archiving falls disproportionately on the non-academic stakeholder.

While digitization foregrounds the potential and promise of complete openness and equity, maybe this is lost in practice. Or digitization may merely mark the displacement of one set of ethics with another. There is a need for more careful consideration of the implications, complexities, and risks of taking CH materials out of boxes and off shelves and transforming and generating it into data files, which are, in turn, dependent on digital platforms to provide end-user access. However, the question remains of whether heritage-related disciplines are adequately prepared and willing to confront such new ways of working, which have begun to dislodge some of the privileges extant in current forms of research and practice.

Krupa Rajangam is nearing the end of her tenure as a Fulbright Fellow at the Historic Preservation Department, Weitzman School of Design, University of Pennsylvania. Her permanent designation is Founder-Director, Saythu…linking people and heritage, a professional conservation collective based in Bangalore, India.

Deborah Sutton is a Professor in Modern South Asian History at Lancaster University.

First Clean Energy Cybersecurity Accelerator Participants Begin Technical Assessment

[From the National Renewable Energy Laboratory (NREL) News]

Program Selected Three Participants for Cohort 1

The Clean Energy Cybersecurity Accelerator™ (CECA)’s first cohort of solution providers—Blue Ridge Networks, Sierra Nevada Corporation, and Xage—recently began a technical assessment of their technologies that offer strong authentication solutions for distributed energy resources.

The selected solution providers will take part in a six-month acceleration period, where solutions will be evaluated in the Advanced Research on Integrated Energy Systems (ARIES) cyber range.

Working with its partners, CECA identified urgent security gaps, supporting emerging technologies as they build security into new technologies at the earliest stage—when security is most effective and efficient. The initiative is managed by the U.S. Department of Energy’s (DOE’s) National Renewable Energy Laboratory (NREL) and sponsored by DOE’s Office of Cybersecurity, Energy Security, and Emergency Response (CESER) and utility industry partners in collaboration with DOE’s Office of Energy Efficiency and Renewable Energy (EERE).

“We are thrilled to welcome and work with the first participants to the secure energy transformation,” said Jon White, director of NREL’s Cybersecurity Program Office. “These cyber-solution providers will work with NREL, using its world-class capabilities, to develop their ideas into real-world solutions. We are ready to build security into technologies at the early development stages when most effective and efficient.”

The selected innovators:

Blue Ridge Networks’ LinkGuard system “cloaks” critical information technology network operations from destructive and costly cyberattacks. The system overlays onto existing network infrastructure to secure network segments from external discovery or data exﬁltration. Through a partnership with Schneider Electric, Blue Ridge Networks helped deploy a solution to protect supervisory control and data acquisition (SCADA) systems for the utility industry.

Sierra Nevada Corporation (SNC)’s Binary Armor® is used by the U.S. Department of Defense and utilities to protect critical assets, with the help of subject matter experts to deliver cyber solutions. SNC plans to integrate as a software solution into a communication gateway or other available edge processing to provide a scalable solution to enforce safe operation in an unauthenticated ecosystem. SNC currently helps secure heating, ventilation, and air conditioning systems; programmable logical controllers; and wildfire detection, with remote monitoring for two different utilities.

Xage uses identity-based access control to protect users, machines, apps, and data, at the edge and in the cloud, enforcing zero-trust access to secure operations and data universally. To test technology in energy sector environments, Xage provides zero-trust remote access, has demonstrated proofs of concept, and deploys local and remote access at various organizations.

Three major U.S. utilities, with more expected to join, are partners with CECA: Berkshire Hathaway Energy, Duke Energy and Xcel Energy. At the end of each cohort cycle, cyber innovators will present their solutions to the utilities with the goal to make an immediate impact.

Additionally, CECA participants benefit from access to NREL’s unique testing and evaluation capabilities, including its ARIES cyber range, developed with support from EERE. The ARIES cyber range provides one of the most advanced simulation environments with unparalleled real-time situational awareness and visualization to evaluate renewable energy system defenses.

Applications for the second CECA cohort will open in early January 2023 for providers offering solutions that uncover hidden risks due to incomplete system visibility and device security and configuration.

NREL is the U.S. Department of Energy’s primary national laboratory for renewable energy and energy efficiency research and development. NREL is operated for DOE by the Alliance for Sustainable Energy LLC.

New Ultrathin Capacitor Could Enable Energy-Efficient Microchips

Scientists turn century-old material into a thin film for next-gen memory and logic devices

[from Berkeley Lab, by Rachel Berkowitz]

Electron microscope images show the precise atom-by-atom structure of a barium titanate (BaTiO3) thin film sandwiched between layers of strontium ruthenate (SrRuO3) metal to make a tiny capacitor. (Credit: Lane Martin/Berkeley Lab)

The silicon-based computer chips that power our modern devices require vast amounts of energy to operate. Despite ever-improving computing efficiency, information technology is projected to consume around 25% of all primary energy produced by 2030. Researchers in the microelectronics and materials sciences communities are seeking ways to sustainably manage the global need for computing power.

The holy grail for reducing this digital demand is to develop microelectronics that operate at much lower voltages, which would require less energy and is a primary goal of efforts to move beyond today’s state-of-the-art CMOS (complementary metal–oxide semiconductor) devices.

Non-silicon materials with enticing properties for memory and logic devices exist; but their common bulk form still requires large voltages to manipulate, making them incompatible with modern electronics. Designing thin-film alternatives that not only perform well at low operating voltages but can also be packed into microelectronic devices remains a challenge.

Now, a team of researchers at Lawrence Berkeley National Laboratory (Berkeley Lab) and UC Berkeley have identified one energy-efficient route—by synthesizing a thin-layer version of a well-known material whose properties are exactly what’s needed for next-generation devices.

First discovered more than 80 years ago, barium titanate (BaTiO₃) found use in various capacitors for electronic circuits, ultrasonic generators, transducers, and even sonar.

Crystals of the material respond quickly to a small electric field, flip-flopping the orientation of the charged atoms that make up the material in a reversible but permanent manner even if the applied field is removed. This provides a way to switch between the proverbial “0” and “1” states in logic and memory storage devices—but still requires voltages larger than 1,000 millivolts (mV) for doing so.

Seeking to harness these properties for use in microchips, the Berkeley Lab-led team developed a pathway for creating films of BaTiO₃ just 25 nanometers thin—less than a thousandth of a human hair’s width—whose orientation of charged atoms, or polarization, switches as quickly and efficiently as in the bulk version.

“We’ve known about BaTiO₃ for the better part of a century and we’ve known how to make thin films of this material for over 40 years. But until now, nobody could make a film that could get close to the structure or performance that could be achieved in bulk,” said Lane Martin, a faculty scientist in the Materials Sciences Division (MSD) at Berkeley Lab and professor of materials science and engineering at UC Berkeley who led the work.

Historically, synthesis attempts have resulted in films that contain higher concentrations of “defects”—points where the structure differs from an idealized version of the material—as compared to bulk versions. Such a high concentration of defects negatively impacts the performance of thin films. Martin and colleagues developed an approach to growing the films that limits those defects. The findings were published in the journal Nature Materials.

To understand what it takes to produce the best, low-defect BaTiO₃ thin films, the researchers turned to a process called pulsed-laser deposition. Firing a powerful beam of an ultraviolet laser light onto a ceramic target of BaTiO₃ causes the material to transform into a plasma, which then transmits atoms from the target onto a surface to grow the film. “It’s a versatile tool where we can tweak a lot of knobs in the film’s growth and see which are most important for controlling the properties,” said Martin.

Martin and his colleagues showed that their method could achieve precise control over the deposited film’s structure, chemistry, thickness, and interfaces with metal electrodes. By chopping each deposited sample in half and looking at its structure atom by atom using tools at the National Center for Electron Microscopy at Berkeley Lab’s Molecular Foundry, the researchers revealed a version that precisely mimicked an extremely thin slice of the bulk.

“It’s fun to think that we can take these classic materials that we thought we knew everything about, and flip them on their head with new approaches to making and characterizing them,” said Martin.

Finally, by placing a film of BaTiO₃ in between two metal layers, Martin and his team created tiny capacitors—the electronic components that rapidly store and release energy in a circuit. Applying voltages of 100 mV or less and measuring the current that emerges showed that the film’s polarization switched within two billionths of a second and could potentially be faster—competitive with what it takes for today’s computers to access memory or perform calculations.

The work follows the bigger goal of creating materials with small switching voltages, and examining how interfaces with the metal components necessary for devices impact such materials. “This is a good early victory in our pursuit of low-power electronics that go beyond what is possible with silicon-based electronics today,” said Martin.

“Unlike our new devices, the capacitors used in chips today don’t hold their data unless you keep applying a voltage,” said Martin. And current technologies generally work at 500 to 600 mV, while a thin film version could work at 50 to 100 mV or less. Together, these measurements demonstrate a successful optimization of voltage and polarization robustness—which tend to be a trade-off, especially in thin materials.

Next, the team plans to shrink the material down even thinner to make it compatible with real devices in computers and study how it behaves at those tiny dimensions. At the same time, they will work with collaborators at companies such as Intel Corp. to test the feasibility in first-generation electronic devices. “If you could make each logic operation in a computer a million times more efficient, think how much energy you save. That’s why we’re doing this,” said Martin.

This research was supported by the U.S. Department of Energy (DOE) Office of Science. The Molecular Foundry is a DOE Office of Science user facility at Berkeley Lab.

Tangled Up Multifactorial Causes

Workers’ Shrinking Share of the Pie

The current issue of the Federal Reserve Bank of Richmond periodical, Econ Focus (second/third quarter 2019) has a good article, “Workers’ Shrinking Share of the Pie” [Archived PDF] which has the following “conclusion:”

So what explains the recent decline in labor’s share? Unfortunately, it is difficult to untangle the separate roles of automation, globalization, and changes in market power. Automation has likely played a role, but its independent impact is hard to gauge, due to the difficulty in differentiating the recent wave of automation from previous episodes in which labor’s share of national income held steady. Globalization appears to have been a strong contributor—a claim that is buttressed by the near simultaneity of the rise in U.S. trade with China and the decline of labor’s share. A variety of evidence also points to firms’ increased pricing power in product markets and workers’ weakened bargaining power in labor markets. In product markets, information technology and globalization appear to have increased the pricing power and profitability of certain dominant firms. And in labor markets, the insecurity engendered by automation and globalization may have helped to weaken workers’ bargaining power. In short, from the perspective of workers, multiple forces have come together to narrow their slice of an expanding economy.

(second/third quarter 2019 Econ Focus, Richmond Fed, page 17)

It so happens that Professor Robert Lawrence of Harvard (Kennedy School) in his very careful analyses, shows how American economic “numbers” in recent years are consistent with internal American numbers from decades ago and this implies the overall transformation of the American economy was primarily from within (“endogenous”) and not till very recently, from without (“exogenous”). Pre-exisiting internal American trends might be the dominant cause for many decades.

The variable or axis “endogenous versus exogenous” (internal pushes or external pulls?) adds a whole dimension to the discussion and we have to therefore avoid mono-causal explanations.

We live not only in a multifactorial world but in one where “inside pushes” can be confused with “external pulls.”

Economics—Atlanta Fed’s November Notes from the Vault

Financial System of the Future

Notes from the Vault
Larry D. Wall
November 2019

The financial services business is an information technology business that operates in an environment with substantial government involvement. The state of both technology and government intervention have evolved considerably since the financial crisis that began in 2007, with potentially large implications for the future financial system. With that in mind, the Atlanta Fed recently hosted the workshop Financial System of the Future, which was cosponsored by the Center for the Economic Analysis of Risk (CEAR) at Georgia State University.

This post reviews many of the papers and presentations from the workshop dealing with both financial regulation and innovations in financial technology. It also reviews one of the keynote speeches on the important topic of corporate governance. A companion macroblog post summarizes the workshop’s discussion of digital currencies.

Post-crisis changes in regulation

Some banks had difficulty obtaining adequate funding from private financial markets during the crisis of 2007–08, despite being well capitalized by that period’s capital standards. In part, these funding difficulties were a result of bank depositors fearing that banks had not adequately provisioned for their credit losses.

A paper by University of Michigan professors Thomas Flanagan and Amiyatosh Purnanandam examines the question “Why Do Banks Hide Losses?” [PDF] with a particular focus on the role of shareholder monitoring and management incentives. One problem in conducting such a study is that of separating bad investment decisions from deceptive accounting. This paper exploits an unexpected change in regulation in India to help provide such separation. This regulatory change forced all of the banks in that country to detail the extent of their underreporting of loan losses in 2015. The paper finds that weaker shareholder monitoring and higher-power executive compensation contracts are associated with more underreporting of loan losses.¹ This paper helps us to understand how banks exploit accounting discretion over loan losses and reinforces the importance of supervisory oversight.

The funding problems encountered by U.S. banks led to runs and ultimately the collapse of a few banks, but these problems had a significant effect on the operations of some banks that survived. One measure of the vulnerability of a bank to a funding shock was its reliance on uninsured, wholesale deposits from large institutions. Professors Sudheer Chava of Georgia Institute of Technology, Rohan Ganduri of Emory University, Linghang Zeng of Babson College, and graduate student Nikhil Paradkar of Georgia Tech examine one effect of these shocks in their paper “Shocked by Bank Funding Shocks: Evidence from 500 Million Consumer Credit Cards” [PDF]. The paper finds that banks that were more exposed to wholesale funding shocks made larger cuts in consumer credit lines than other banks. The authors further find that these cutbacks were made to the most credit-constrained customers (those with lower credit scores and higher utilization of their credit line). The results also suggest that these credit-constrained consumers responded by cutting back their consumption. Overall, these results provide additional support for regulatory policies intended to strengthen banks so that they can continue lending through future crises.

The Federal Reserve was created in 1913 in large part to provide a source of liquidity during periods of stress in bank lending markets. Yet banks proved surprisingly resistant to borrowing from the Fed’s discount window at the start of the funding problems in the fall of 2007. In an attempt to overcome this reluctance to borrow, the Fed created the Term Auction Facility (TAF) in December 2007. A paper by professors Yunzhi Hu of the University of North Carolina at Chapel Hill and Hanzhe Zhang from Michigan State University examines the TAF in a paper titled “Overcoming Borrowing Stigma: The Design of Lending-of-Last-Resort Policies” [PDF]. This paper develops a simple model in which TAF funding is preferred by stronger banks because the funds are only available with a delay (that is, the funds will not help a bank facing an immediate run) and because TAF gives stronger banks the potential to borrow at lower costs. The paper also provides evidence that when both the discount window and TAF were available, the weakest banks borrowed from the discount window and the relatively stronger banks bid for TAF funds. The results of this study may help to inform the Fed’s policies on the provision of emergency liquidity in the future.

In the post-crisis period, the bank supervisors agreed to adopt new liquidity rules and strengthen existing capital requirements at the Basel Committee on Banking Supervision. A paper by Harvard University professor Daniel Roberts and Federal Reserve Bank of New York economists Asani Sarkar and Or Shachar examines the Basel liquidity requirements in the paper “Bank Liquidity Creation, Systemic Risk, and Basel Liquidity Regulations” [PDF]. The paper finds that the new regulation has the cost of reducing bank liquidity creation in normal times but also results in more resilient banks in a crisis. The authors estimate both the costs and benefits of the regulation and find that the benefits in terms of a more stable financial system exceed the costs of the reduction in liquidity.

Josef Schroth, an economist at the Bank of Canada, analyzes the question of how regulators could use capital regulation to smooth bank lending through a recession and financial crisis in his paper “Macroprudential Policy with Capital Buffers” [PDF]. Banks in his model hold sufficient capital in most periods but have insufficient capital to retain uninsured market funding during crises, which leads to severe credit crunches. Bank regulators can smooth lending by requiring banks to hold more capital during good times, also allowing banks to operate with reduced capital during a crisis and rebuild their capital gradually after a crisis. The paper’s findings are consistent with the Basel III’s creation of a capital conservation buffer and countercyclical capital buffer.

Issues related to bank capital have been the subject of ongoing discussion among academics, bankers, and regulators since the crisis. Bank of Finland economists Gene Ambrocio and Esa Jokivuolle, along with professors Iftekhar Hasan from Fordham University and Kim Ristolainen from the University of Turku, surveyed the views of banking and finance academics and reported the results in the paper “Are Bank Capital Requirements Optimally Set? Evidence from Researchers’ Views” [PDF] (slide deck [PDF]). The survey obtained results from 149 leading academic researchers. It found that most respondents believe that higher capital ratios would reduce the likelihood of a crisis and the social costs associated with a crisis. Most respondents thought an increase of 5 percentage points in capital would increase the average cost of capital and reduce bank lending. However, a majority said that this reduction in lending would result in “minimal to no change” in economic activity.

Fintech lending

Banks have historically been important suppliers of credit to consumers and small businesses. However, since the crisis, lending by some fintech firms to these borrowers has grown rapidly. The conference addressed a variety of questions such as the sources of competitive advantage to fintech lenders; competition between fintech lenders, small banks, and large banks; and the impact of fintech lending on consumers. Additionally, the conference looked at post-crisis changes in bank securitization rules, which may have some relevance to fintech lenders’ efforts to fund their loans.

Banks, especially large banks, have long used statistical analysis to help them predict the credit riskiness of consumers and small businesses. However, fintech firms have promoted their use of machine learning techniques as resulting in better credit analysis. Economist J. Christina Wang and former research associate Charles B. Perkins from the Federal Reserve Bank of Boston explore the value added of some machine learning techniques in their paper “How Magic a Bullet Is Machine Learning for Credit Analysis? An Exploration with Fintech Lending Data” [PDF]. In particular, they examine the contribution of tree-based models using data from LendingClub, a fintech lender. Tree-based models provide easily understood decision rules that are valuable for demonstrating compliance with U.S. fair lending rules. The results indicate that tree-based machine learning improves prediction accuracy, in part by uncovering notable interactive effects. These models benefit from additional data (albeit only up to about 5,000 observations) and from the addition of more predictors. However, exactly which tree-based approach worked best varied across different subgroups of consumers.

Many large banks retreated from some types of retail and small business lending. In part, this pullback was likely to due to a combination of the increased riskiness of these loans and the tightening of bank capital requirements. However, fintech lenders have been expanding into some of the same spaces, raising the question of whether the reduced lending by big banks was due in part to competitive pressure from fintech firms. It also raises the question of whether smaller banks were also retreating due to increased competition or expanding to help fill the void left by the larger banks. Two papers examine the rise of fintechs in two different lending markets and analyze what developments in these markets tell us about big versus small banks.

Professors Taylor Begley from Washington University in St. Louis and Kandarp Srinivasan from Northeastern University focus on mortgage market lending in their paper “Small Bank Lending in the Era of Fintech and Shadow Banking: A Sideshow?” [PDF]. Their paper observes that fintech lenders rely largely on government-supported loan securitization programs such as those of Fannie Mae, Freddie Mac, and the Federal Housing Administration. However, not all mortgage loans qualify for these programs in large part due to limits on the maximum size of the loan. Thus, fintech mortgage lenders were able to take nationwide market share in government-supported loans from the large banks. Nevertheless, it was the small banks that stepped in to provide mortgage loans that did not qualify for government-supported securitization. As a result, small banks have proven more responsive to the withdrawal of bigger banks and have maintained nearly constant market share through the period from 2009 to 2013.

The paper “What Is Fueling the Fintech Lending Revolution? Local Banking Market Structure and Fintech Market Penetration” [PDF] by professor Tetyana Balyuk of Emory University and professors Allen N. Berger and John Hackney from the University of South Carolina studies the rise of fintech lenders in small business lending. The authors find that fintech lenders’ market penetration is associated with lower small bank market shares, consistent with the decline of small banks over time and helping to explain fintech lenders’ success. They also find evidence that small banks tend to make safer loans than fintech firms. Finally, looking at the contribution of different lenders to employment, the authors find that fintech matters most for the smallest businesses, small banks matter more for larger small businesses, and neither matters for large businesses.

As fintech lending has grown, the question of whether it is good for consumers has also arisen. This may be a trick question. We have long known that if people are given a choice, some will use it wisely and others will not. Last year’s CEAR–CenFIS conference provided some evidence of how consumers manage their finances after borrowing from fintech lenders (see “Winners and Losers of Marketplace Lending: Evidence From Borrower Credit Dynamics” [PDF] and “The Real Effects of Financial Technology: Marketplace Lending and Personal Bankruptcy” [PDF]). This year, Federal Reserve Board economists Traci Mach and Timothy Dore provided additional evidence in the paper “Marketplace Lending and Consumer Credit Outcomes: Evidence from Prosper” [PDF]. The authors were able to match application data from one lender to credit bureau data. They find that relative to applicants without an origination, borrowers see an increase in their credit scores and total debt, but decreases in their delinquency rates. The increase in mortgage debt balances was especially notable.

An important issue for any type of lender is its access to funding. Banks fund their loans with a combination: (a) their own liabilities in the form of deposits and other market borrowings and (b) loan sales to investors. The risk with on-balance-sheet lending is that too many loans will turn bad, the bank will suffer large loan losses, and depositors will flee the bank. Although some fintech firms fund loans with their own liabilities, most of their loans are funded by sales to investors. The advantage to the loan originator of selling loans is that, if the loan goes bad, the buyers of the loan bear the credit losses. However, such sales can lead to concerns that the bank or fintech originating a loan will not be as careful in underwriting and monitoring as they would be with the loans they retain on their own books. The result can be similar to that discussed in the Chava et al. paper, where originators have to reduce their lending volume.

One alternative that may have the effect of improving banks’ incentives and thereby mitigating investor concerns is that of having the bank retain part of the credit risk on the loans it sells. Professor Martin Hibbeln and graduate student Werner Osterkamp from the University of Duisburg-Essen study the effect of bank loan retention in their paper “The Impact of Skin in the Game on Bank Behavior in the Securitization Market” [PDF]. The authors exploit changes in European Union regulations to study loans sold by European banks in the securitization market. They find evidence that retention of part of the risk of a loan does not improve the quality of the loans being securitized.

Corporate governance

The role of shareholders in corporate governance is important for both financial and non-financial firms. The last few decades have seen shareholder governance power increasingly concentrated in institutional investors such as mutual funds and pension funds. Although a few of these institutional funds are explicitly focused on corporate governance issues, most are not. However, even the funds that are not focused on governance nevertheless have an interest in participating in governance decisions. The problem for these investors is how to keep up with the many issues requiring a shareholder vote. The answer for a large fraction of institutional investors is to seek information and advice from proxy advisory firms. The role of these advisory firms was the topic of Carnegie Mellon University professor Chester Spatt’s dinner speech titled “Proxy Advisory Firms, Governance, Market Failure, and Regulation” [PDF] (See also his related paper [PDF].)

Spatt observed that the importance of proxy advisory firms is easy to understand. All shareholders in a firm face the same questions, and there is similarity in questions across firms. However, any one shareholder obtains only a small fraction of the gains from better governance while potentially paying all of the costs of analysis. In this setting, proxy advisory firms are a predictable market solution to a potential free-riding problem. The increasing returns to scale that arise in this setting also naturally lends itself to the development of a monopoly—or in this case, a duopoly. The result can be reduced incentives for the two proxy advisory firms to avoid factual mistakes and increased power for the advisers to impose their philosophy on firms. Spatt discussed a variety of steps the Securities and Exchange Commission has taken and further actions that could mitigate these concerns. However, the problem of what to do about the role of institutions and proxy advisers in corporate governance is one that may not be totally solvable, but rather requires careful management over time.

Conclusion

The post-crisis period has seen dramatic changes in both information technology and government regulation. The papers presented recently at a workshop at the Atlanta Fed analyzed a number of these changes and contribute to our understanding of how the financial system is likely to evolve in the future.

Larry D. Wall is executive director of the Center for Financial Innovation and Stability at the Atlanta Fed. The author thanks Brian Robertson for helpful comments. The view expressed here are the author’s and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. If you wish to comment on this post, please email atl.nftv.mailbox@atl.frb.org.

¹ For further discussion on banks’ reporting of loan losses, see Larry’s recent post on changes to U.S. accounting rules.