Bank account
What You Don't Know Can Hurt You: Knowledge Problems in Monetary Policy
Alexander Salter & Daniel Smith
Contemporary Economic Policy, forthcoming
Abstract:
Many economists hold that monetary policy missteps played a role in causing or prolonging the 2007–2008 financial crisis. In light of the perceived failure of monetary orthodoxy, models are being theoretically refined and empirically recalibrated. Absent from these technical debates is a recognition of the immense knowledge burdens inherent in monetary policy. We argue that Fed authorities do not have the knowledge required to achieve their own monetary objectives, given their inability to approximately measure or predict changes in the demand for money. Finally, we evaluate the ability of free banking to overcome this knowledge problem.
Mortgage Characteristics and the Racial Incidence of Default
Phillip Li & Tom Mayock
U.S. Department of the Treasury Working Paper, February 2017
Abstract:
Previous research has shown that relative to White borrowers, Black and Hispanic borrowers taking out mortgages at the height of the early-2000s housing boom experienced significantly higher delinquency rates. In this paper we attempt to gain a better understanding of the mechanisms that gave rise to these racial differences in mortgage delinquency. Using a database of nearly 9 million mortgages originated between 2005 and 2009, we find that minority borrowers were significantly more likely to have mortgages with high-risk contract characteristics, such as prepayment penalties, variable interest rates, balloon structures, and negative amortization periods. Results from mortgage default models and a decomposition exercise show that the concentration of minority buyers in such loans explains a significant fraction of the difference in default rates between racial groups. The totality of our results suggest that exotic loan characteristics acted as mortgage default accelerants for many minority homeowners that experienced significant income and equity shocks during the Great Recession.
Are Larger Banks Valued More Highly?
Bernadette Minton, René Stulz & Alvaro Taboada
NBER Working Paper, March 2017
Abstract:
We investigate whether the value of large banks, defined as banks with assets in excess of the Dodd-Frank threshold for enhanced supervision, increases with the size of their assets using Tobin’s q and market-to-book as our valuation measures. Many argue that large banks receive subsidies from the regulatory safety net, so they should be worth more and their valuation should increase with size. Instead, using a variety of approaches, we find (1) no evidence that large banks are valued more highly, (2) strong cross-sectional evidence that the valuation of large banks falls with size, and (3) strong evidence of a within-bank negative relation between valuation and size for large banks from 1987 to 2006 but not when the post-Dodd-Frank period is included in the sample. The negative relation between bank value and bank size for large banks cannot be systematically explained by differences in ROA or ROE, equity volatility, tail risk, distress risk, and equity discount rates. However, we find that banks with more trading assets are worth less. A 1% increase in trading assets is associated with a Tobin’s q lower by 0.2% in regressions with year and bank fixed effects. This relation between bank value and trading assets helps explain the cross-sectional negative relation between large bank valuation and size. Our results hold when we use instrumental variables for bank size.
The Effect of Bank Supervision on Risk Taking: Evidence from a Natural Experiment
John Kandrac & Bernd Schlusche
Federal Reserve Working Paper, March 2017
Abstract:
We demonstrate the effect of supervision on financial institutions' willingness to take risk by exploiting a natural experiment in which thrifts in several states witnessed a dramatic and exogenous reduction in supervisory attention. We show that the affected institutions took on much more risk than their unaffected counterparts in other districts that were subject to identical regulations. Subsequent to the emergency enlistment of examiners and supervisors from other parts of the country two years later, additional risk taking by the affected thrifts ceased. We find that the expansion in risk taking resulted in more costly failures, as well as a higher incidence of failure. None of these patterns are present in commercial banks subject to a different primary supervisory agent but otherwise similar to the thrifts in our sample.
Fintech, Regulatory Arbitrage, and the Rise of Shadow Banks
Greg Buchak et al.
NBER Working Paper, March 2017
Abstract:
We study the rise of fintech and non-fintech shadow banks in the residential lending market. The market share of shadow banks in the mortgage market has nearly tripled from 2007-2015. Shadow banks gained a larger market share among less creditworthy borrowers, with a tilt towards refinancing mortgages. Shadow banks were significantly more likely to enter markets where traditional banks faced more regulatory constraints. This suggests that traditional banks retreated from markets with a larger regulatory burden, and that shadow banks filled this gap. Fintech firms accounted for almost a third of shadow bank loan originations by 2015. To isolate the role of technology in the decline of traditional banking, we focus on technology differences between shadow banks, holding the regulatory differences between different lenders fixed. Analyzing fintech firms’ entry and pricing decisions, we find some evidence that fintech lenders possess technological advantages in determining corresponding interest rates. More importantly, the online origination technology appears to allow fintech lenders to originate loans with greater convenience for their borrowers. Among the borrowers most likely to value convenience, fintech lenders command an interest rate premium for their services. We use a simple model to decompose the relative contribution of technology and regulation to the rise of shadow banks. This simple quantitative assessment indicates that increasing regulatory burden faced by traditional banks and financial technology can account, respectively, for about 55% and 35% of the recent shadow bank growth.
Network Reactions to Banking Regulations
Selman Erol & Guillermo Ordoñez
Journal of Monetary Economics, forthcoming
Abstract:
Optimal regulatory restrictions on banks have to solve a delicate balance. Tighter regulations reduce the likelihood of banks’ distress. Looser regulations foster the allocation of funds towards productive investments. With multiple banks, optimal regulation becomes even more challenging. Banks form partnerships in the interbank lending market in order to face liquidity needs and to meet investment possibilities. We show that the interbank network can suddenly collapse when regulations are pushed beyond a critical level, with a discontinuous increase in systemic risk as the cross-insurance of banks collapses.
Loan Contracting in the Presence of Usury Limits: Evidence from Automobile Lending
Brian Melzer & Aaron Schroeder
Consumer Financial Protection Bureau Working Paper, March 2017
Abstract:
We study the effects of interest rate ceilings on the market for automobile loans. We find that loan contracting and the organization of the loan market adjust to facilitate loans to risky borrowers. When usury restrictions bind, automobile dealers finance a greater share of their customers' purchases, which allows them to price credit risk through the mark-up on the product sale rather than the loan interest rate. Despite having little effect on who receives credit, usury limits therefore have a substantial effect on who provides credit and on the terms of credit granted. Usury limits may harm defaulting borrowers, who face greater liabilities in default than they would if loan contracts were unconstrained.
Do Professional Norms in the Banking Industry Favor Risk-taking?
Alain Cohn, Ernst Fehr & Michel André Maréchal
Review of Financial Studies, forthcoming
Abstract:
In recent years, the banking industry has witnessed several cases of excessive risk-taking that frequently have been attributed to problematic professional norms. We conduct experiments with employees from several banks in which we manipulate the saliency of their professional identity and subsequently measure their risk aversion in a real stakes investment task. If bank employees are exposed to professional norms that favor risk-taking, they should become more willing to take risks when their professional identity is salient. We find, however, that subjects take significantly less risk, challenging the view that the professional norms generally increase bank employees’ willingness to take risks.
The Global Rise of Corporate Saving
Peter Chen, Loukas Karabarbounis & Brent Neiman
Journal of Monetary Economics, forthcoming
Abstract:
The sectoral composition of global saving changed dramatically during the last three decades. Whereas in the early 1980s most of global investment was funded by household saving, nowadays nearly two-thirds of global investment is funded by corporate saving. This shift in the sectoral composition of saving was not accompanied by changes in the sectoral composition of investment, implying an improvement in the corporate net lending position. We characterize the behavior of corporate saving using both national income accounts and firm-level data and clarify its relationship with the global decline in labor share, the accumulation of corporate cash stocks, and the greater propensity for equity buybacks. We develop a general equilibrium model with product and capital market imperfections to explore quantitatively the determination of the flow of funds across sectors. Changes including declines in the real interest rate, the price of investment, and corporate income taxes generate increases in corporate profits and shifts in the supply of sectoral saving that are of similar magnitude to those observed in the data.
The Effect of Corporate Taxation on Bank Transparency: Evidence from Loan Loss Provisions
Kathleen Andries, John Gallemore & Martin Jacob
Journal of Accounting and Economics, forthcoming
Abstract:
We examine how the corporate tax system, through its treatment of loan losses, affects bank financial reporting. Exploiting cross-country and intertemporal variation in income tax rates and loan loss provision deductibility, we find that loan loss provisions are increasing in the tax rate for countries that permit general provision tax deductibility. When general provisions are deductible, a 1 percentage point rate increase leads to a provision increase of 4.9% of the sample average. This effect is driven by the tax system's encouragement of timelier loan loss recognition, suggesting that corporate taxation is an important determinant of bank financial reporting transparency.
Finance and sources of growth: Evidence from the U.S. states
Michał Jerzmanowski
Journal of Economic Growth, March 2017, Pages 97–122
Abstract:
How does financial development affect economic growth: through its impact on accumulation of physical and human capital or by boosting total factor productivity (TFP) growth? We use a new data set on output, inputs, and total factor productivity for the US states to study this question. Unlike previous cross-country research that tries to disentangle the channels through which financial development impacts growth, we use a plausibly exogenous measure of financial development: the timing of banking deregulation across states during the period 1970–2000. At the same time our new data set allows us to go beyond what was previously done in the state banking deregulation literature and identify whether finance impacts states’ input accumulation or TFP growth. We find, in line with existing cross-country studies, that deregulation boosts growth by accelerating both TFP growth and the accumulation of physical capital without having any impact on human capital. In contrast to the cross-country studies, we also find that the effects of deregulation are largely independent of states’ initial level of development; both rich and poor states grow faster after deregulation. Additionally, since our data set breaks down aggregate output into three sectors: agriculture, manufacturing, and the remaining industries, we are able to show that deregulation accelerates the growth of productivity in manufacturing. This last finding answers an important critique of the banking deregulation studies which asserts that observed growth effects may be coming from the growth of financial industry itself and not from the beneficial effect of finance on other industries, such as manufacturing.
Bankruptcy Spillovers
Shai Bernstein et al.
NBER Working Paper, February 2017
Abstract:
How do different bankruptcy approaches affect the local economy? Using U.S. Census microdata at the establishment level, we explore the spillover effects of reorganization and liquidation on geographically proximate firms. We exploit the random assignment of bankruptcy judges as a source of exogenous variation in the probability of liquidation. We find that within a five-year period, employment declines substantially in the immediate neighborhood of the liquidated establishments, relative to reorganized establishments. Most of the decline is due to lower growth of existing establishments and, to a lesser extent, reduced entry into the area. The spillover effects are highly localized and concentrate in the non-tradable and service sectors, particularly when the bankrupt firm operates in the same sector. These results suggest that liquidation leads to a reduction in consumer traffic to the local area and to a decline in knowledge spillovers between firms. The evidence is inconsistent with the notion that liquidation leads to creative destruction, as the removal of bankrupt businesses does not lead to increased entry nor the revitalization of the area.
What Begets Loan Performance? The Human Factor in the Corporate Lending Market
Janet Gao, Xiumin Martin & Joseph Pacelli
Indiana University Working Paper, November 2016
Abstract:
We examine the role of loan officers in the private debt market. We construct a comprehensive database that allows us to track the employment history, performance and lending terms related to over 7,000 loan officers employed by major U.S. corporate lending departments from the period spanning 1994 to 2012. We find evidence consistent with loan officers having a substantial impact on ex-post loan performance, after controlling for observable lending terms, borrower, bank, and industry characteristics. Moreover, loan officers also appear to be more important than banks in explaining the variation of loan performance. We further show that loan officers exhibit heterogeneous loan origination styles as reflected in their lending terms and these styles appear to be associated with loan performance. Finally, we find that loan officers play an equally important role in both large banks and small banks and that their future lending performance is highly influenced by early employment choices. Overall, our study highlights the importance of human capital in the corporate lending market.