Banking on It
Partisanship in loan pricing
Ramona Dagostino, Janet Gao & Pengfei Ma
Journal of Financial Economics, December 2023
Abstract:
Does partisanship influence the way investors price financial assets? Using voter registration data of bankers originating large corporate loans, we show that bankers whose party differs from that of the U.S. President charge 7% higher loan spreads than other bankers. This effect holds regardless of borrowers' partisanship, and becomes stronger for politically active bankers and when partisan media exhibit greater disagreement. Bankers do not match disproportionately with co-partisan borrowers but they lead syndicates more frequently with co-partisan bankers. Our results are not driven by bank or borrower fundamentals, but suggest that investor optimism, driven by political alignment, shapes asset prices.
Is There Really an Inflation Tax? Not For the Middle Class and the Ultra-Wealthy
Edward Wolff
NBER Working Paper, October 2023
Abstract:
One hallmark of U.S. monetary policy since the early 1980s has been moderation in inflation (at least, until recently). How has this affected household well-being? The paper first develops a new model to address this issue. The inflation tax on income is defined as the difference between the nominal and real growth in income. This term is always negative (as long as inflation is positive). The inflation gain on household wealth is the revaluation resulting from asset price changes directly linked to inflation. This term can be positive or negative. The net inflation gain is the difference between the two, which can also be positive or negative. The empirical analysis covers years 1983 to 2019 on the basis of the Federal Reserve Board's Survey of Consumer Finances (SCF) and historical inflation rates. It also looks at the sensitivity of the results to alternative inflation rates, and considers the effects of inflation on real wealth growth, wealth inequality, and the racial wealth gap. The results show that inflation boosted the real income of the middle wealth quintile by a staggering two thirds. In contrast, the bottom two wealth quintiles got clobbered by inflation, losing almost half of their real income. Inflation also boosted mean and especially median real wealth growth, reduced wealth inequality, and lowered the racial and ethnic wealth gap. Both the income and wealth results are magnified at higher (simulated) rates of inflation.
Big Banks, Household Credit Access, and Intergenerational Economic Mobility
Erik Mayer
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
Consolidation in the United States banking industry has led to larger banks. I find that low income households face reduced access to credit when local banks are large. This result appears to stem from large banks' comparative disadvantage using soft information, which is particularly important for lending to low income households. In contrast, the size of local banks has little or no effect on high income households. Consistent with low income parents' credit constraints limiting investment in their children's human capital, areas with larger banks exhibit a greater sensitivity of educational attainment to parental income, and less intergenerational economic mobility.
Tax Incentives and the Supply of Low-Income Housing
Evan Soltas
MIT Working Paper, November 2023
Abstract:
Subsidies to developers are a core instrument of housing policy. How do they affect housing markets, and who benefits? I assess their impacts and incidence with a dynamic model of housing markets and new data on developers competing for Low-Income Housing Tax Credits. I estimate the model using three sources of variation: quasi-random assignment of subsidies, shocks to subsidy generosity, and nonlinearities in scoring rules for subsidy applications. I find that, due to displacement of unsubsidized housing, subsidies add few net units to the housing stock and instead reallocate units progressively. Households benefit from developer competition for subsidies, but competition also results in high entry costs, and developers still capture nearly half of the welfare gains. In counterfactuals, a stylized voucher program can generate the same household benefits at less fiscal cost.
The Impact of Institutional Investors on Homeownership and Neighborhood Access
Joshua Coven
NYU Working Paper, August 2023
Abstract:
I estimate a demand system to study the effects of institutional investors' conversion of large fractions of owner-occupied housing into rentals in the suburbs of US cities. I find the purchases and subsequent conversions of houses resulted in a tradeoff between homeowners and renters. Institutional investors decreased the housing available for owner-occupancy by 30% of the homes they converted, and their demand shock raised the price of housing in a census PUMA by 7.4pp per 1pp of housing they purchased. Higher prices made it harder for people to buy homes. However, the institutional investors increased the supply of homes available for renter occupancy by 69% of the houses they converted, and lowered rents by 2.3pp per 1pp of housing they purchased. The increase in the supply of rental housing allowed the financially constrained to move into neighborhoods that previously had few rental units. The people who moved into institutional investor-owned homes had lower incomes, a lower likelihood of having a bachelor's degree, were more likely to be white, came from areas with worse historic economic mobility, and came from areas with lower school test scores than others who moved into the same census tracts. The findings suggest that institutional investors made it harder for people to purchase homes, but easier for renters to access neighborhoods that previously had few rentals.
Global impacts of US monetary policy uncertainty shocks
Povilas Lastauskas & Anh Dinh Minh Nguyen
Journal of International Economics, forthcoming
Abstract:
We build a new empirical model, which admits time-varying variances of local structural shocks, to estimate the global impact of an increase in the volatility of US monetary policy shocks. By allowing for rich dynamic interaction between the endogenous variables and time-varying volatility in the global setting, we find that US interest rate uncertainty not only drives local output and inflation volatility, but also causes declines in output, inflation, and the interest rate. Moreover, we document strong global impacts, making the world move in a very synchronous way. Crucially, spillback effects are found to be significant even for the US economy.
What Triggers Mortgage Default? New Evidence from Linked Administrative and Survey Data
David Low
Review of Economics and Statistics, forthcoming
Abstract:
Why do homeowners default on mortgages? This paper studies the question using a survey specifically designed for the purpose, with a sample drawn from (and matched to) very rich administrative data. I find that a wide variety of typically-unobserved liquidity shocks together trigger nearly all defaults, so "strategic" default with no liquidity trigger is much less common than it usually appears. Conversely, even in this uniquely rich data I find that many foreclosures are not triggered by negative home equity, contrary to the predictions of almost every model in the literature.
Population Aging and Bank Risk-Taking
Sebastian Doerr, Gazi Kabaş & Steven Ongena
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
What are the implications of an aging population for financial stability? To examine this question, we exploit geographic variation in aging across U.S. counties. We establish that banks with higher exposure to aging counties increase loan-to-income ratios. Laxer lending standards lead to higher nonperforming loans during downturns, suggesting higher credit risk. Inspecting the mechanism shows that aging drives risk-taking through two contemporaneous channels: deposit inflows due to seniors' propensity to save in deposits; and depressed local investment opportunities due to seniors' lower credit demand. Banks thus look for riskier clients, especially in counties where they operate no branches.