This issue of FTG Insights show that financial regulation and innovation often reshape incentives and constraints in ways that generate powerful equilibrium feedback effects. Specifically, mechanisms intended to promote stability, inclusion, or safety can improve outcomes along one dimension while simultaneously creating new vulnerabilities elsewhere in the financial system.

The first two columns explore how new financial frictions emerge when technology and regulation reshape the balance sheets of intermediaries. “When the Marketplace Becomes the Lender” examines the rapid rise of bigtech lending platforms, showing that their close integration with merchants’ marketplace activity gives them a powerful enforcement advantage over traditional banks. While this expands credit access for underserved borrowers, it also induces adverse selection in bank lending and can perversely lead banks to ration credit for intermediate-risk firms. “When Deposits Become a Burden” studies a parallel tension within the banking sector itself. Deposits are traditionally viewed as cheap and stable funding, yet when equity capital is scarce and leverage constraints bind, abundant deposits can become a liability rather than an asset. Banks may respond by cutting lending, hoarding safe assets, or reducing deposit rates, helping explain why deposit inflows during the pandemic coincided with weaker credit expansion. Together, these two columns highlight a broader lesson: financial innovations and regulatory constraints often generate unintended equilibrium effects, where mechanisms that improve access to funding in one dimension can tighten credit conditions in another.

The last two columns focus on how regulation and market design can produce unintended consequences in financial markets. “Are Stress Tests Actually Useful?” argues that the value of stress tests depends critically on what regulators plan to do with the information they reveal. If regulators can only impose broad capital requirements, even carefully designed stress scenarios add relatively little value. But when supervisors can intervene in targeted ways (by restricting specific exposures or by directing some banks to reduce risk), the design of stress scenarios becomes central to effective regulation. “Safe Assets but Fragile Markets” is inspired by the turmoil in the U.S. Treasury market during March 2020, when Treasuries unexpectedly experienced a “dash for cash.” The column shows how post-crisis regulations that constrained dealer balance sheets transformed the market structure for safe assets, making Treasury markets vulnerable to self-fulfilling runs. Ironically, the same flight-to-safety behavior that traditionally stabilizes markets can, in sufficiently fragile environments, trigger destabilizing fire sales instead.