Liquid state
Monetary policy, housing rents, and inflation dynamics
Daniel Dias & Joao Duarte
Journal of Applied Econometrics, forthcoming
Abstract:
In this paper we study the effect of monetary policy shocks on housing rents. Our main finding is that, in contrast to house prices, housing rents increase in response to contractionary monetary policy shocks. We also find that, after a contractionary monetary policy shock, rental vacancies and the homeownership rate decline. This combination of results suggests that monetary policy may affect housing tenure decisions (own versus rent). In addition, we show that, with the exception of the shelter component, all other main components of the consumer price index (CPI) either decline in response to a contractionary monetary policy shock or are not responsive. These findings motivated us to study the statistical properties of alternative measures of inflation that exclude the shelter component. We find that measures of inflation that exclude shelter have most of the statistical properties of the widely used measures of inflation, such as the CPI and the price index for personal consumption expenditures (PCE), but have higher standard deviations and react more to monetary policy shocks. Finally, we show that the response of housing rents accounts for a large proportion of the “price puzzle” found in the literature.
Enforcement of banking regulation and the cost of borrowing
Yota Deli et al.
Journal of Banking & Finance, April 2019, Pages 147-160
Abstract:
We show that borrowing firms benefit substantially from important enforcement actions issued on U.S. banks for safety and soundness reasons. Using hand-collected data on such actions from the main three U.S. regulators and syndicated loan deals over the years 1997-2014, we find that enforcement actions decrease the total cost of borrowing by approximately 22 basis points (or $4.6 million interest for the average loan). We attribute our finding to a competition-reputation effect that works over and above the lower risk of punished banks post-enforcement and survives in a number of sensitivity tests. We also find that this effect persists for approximately four years post-enforcement.
The Impact of Banking Regulation on Voluntary Disclosures: Evidence from the Dodd-Frank Act
Anya Kleymenova & Li Zhang
University of Chicago Working Paper, February 2019
Abstract:
We investigate how the Dodd-Frank Act (DFA) affects voluntary disclosures of large bank holding companies (BHCs) relative to other banks and unregulated firms in the financial sector. Using a difference-in-differences research design, we find that following the introduction of the DFA, large banks become less likely to issue earnings forecasts containing bad news. They also reduce the frequency of issuing earnings forecasts but increase the frequency of providing forecasts for dividends and return on assets. In earnings-related conference calls, managers of large banks offer information with incrementally higher numerical and forward-looking intensity in both the prepared remarks and their answers to analysts’ questions. Finally, we find that large banks provide incrementally less information than other banks about certain regulated activities and instead focus more on commercial banking financial performance and market innovation. Our findings provide the first evidence of the unintended consequences of the DFA on changes in affected banks’ voluntary disclosures, an important component of the information environment.
The Impact of the Durbin Amendment on Banks, Merchants, and Consumers
Vladimir Mukharlyamov & Natasha Sarin
University of Pennsylvania Working Paper, February 2019
Abstract:
After the Great Recession, new regulatory interventions were introduced to protect consumers and reduce the costs of financial products. Some voiced concern that direct price regulation was unlikely to help consumers, because banks offset losses in one domain by increasing the prices that they charge consumers for other products. This paper studies this issue using the Durbin Amendment, which decreased the interchange fees that banks are allowed to charge merchants for processing debit transactions. Merchant interchange fees, previously averaging 2 percent of transaction value, were capped at $0.22, decreasing bank revenue by $6.5 billion annually. The objective of Durbin was to increase consumer welfare. For consumers to benefit, banks needed to not offset Durbin losses and merchants needed to pass through savings to consumers. Instead, we find causal evidence that banks fully offset losses by charging higher fees for their products: For example, following Durbin, the provision of free checking accounts decreases by 40 percentage points. On the merchant side, we find that retailers pass-through savings most when debit usage is common and when competitive pressures are highest. However, we find little evidence of across-the-board consumer savings. Our analysis suggests that consumers are not helped by this interchange regulation.
The Political Economy of Mortgage Lending
Yongqiang Chu & Tim (Teng) Zhang
University of North Carolina Working Paper, November 2018
Abstract:
We examine whether banks use mortgage lending as a tool for political influence seeking. We find that the approval rates for mortgage applications from the home states of the Senate Banking Committee Chairs are higher than other states, which amounts to about $37-$38 million dollars of extra mortgage credit extended per year to the home states of the Senate Banking Committee Chair. We use the geographic regression discontinuity design by comparing census tracts close to the state borders to ensure that the results are not driven by demand-side factors. We find the effect is more pronounced when the incumbent banking chair is up for re-election. We do not find a similar effect for other power committee chairs. We also do not find the effect for non-bank lenders.
Bank Leverage, Welfare, and Regulation
Anat Admati & Martin Hellwig
Stanford Working Paper, January 2019
Abstract:
We take issue with claims that the funding mix of banks, which makes them fragile and crisis-prone, is efficient because it reflects special liquidity benefits of bank debt. Even aside from neglecting the systemic damage to the economy that banks’ distress and default cause, such claims are invalid because banks have multiple small creditors and are unable to commit effectively to their overall funding mix and investment strategy ex ante. The resulting market outcomes under laissez-faire are inefficient and involve excessive borrowing, with default risks that jeopardize the purported liquidity benefits. Contrary to claims in the literature that “equity is expensive” and that regulation requiring more equity in the funding mix entails costs to society, such regulation actually helps create useful commitment for banks to avoid the inefficiently high borrowing that comes under laissez-faire. Effective regulation is beneficial even without considering systemic risk; if such regulation also reduces systemic risk, the benefits are even larger.
The revolving door, state connections, and inequality of influence in the financial sector
Elise Brezis & Joël Cariolle
Journal of Institutional Economics, forthcoming
Abstract:
This paper shows that the revolving door generates inequality of influence between financial firms and creates economic distortions. We first develop a theoretical model, introducing the notion of “bureaucratic capital” and stressing how the revolving door generates inequality in bureaucratic capital leading to inequality in profits. Then this prediction is tested, using a new database that tracks the revolving door process involving the 20 biggest US “diversified banks.” We show that regulators who supply a large stock of bureaucratic capital are more likely to be hired by the top five banks. We also develop indices of the inequality of influence between banks. We show that banks in the top revenue quintile concentrate around 80% of revolving door movements. Goldman Sachs appears as the prime beneficiary of this process, capturing approximately 30% of the total stock of bureaucratic capital.
Do Financial Crises Cleanse the Banking Industry? Evidence from US Commercial Bank Exits
Laima Spokeviciute, Kevin Keasey & Francesco Vallascas
Journal of Banking & Finance, February 2019, Pages 222-236
Abstract:
We examine the cleansing effect of financial crises via their contribution to the exit of inefficient US commercial banks from 1984 to 2013. We find a larger increase in the exit likelihood of less efficient banks as compared to more efficient banks in the years of the Savings and Loans Crisis but not during the Global Financial Crisis. We highlight how the magnitude of the shock of the Global Financial Crisis and the subsequent, broad government interventions might explain these different results. Furthermore, we highlight that both crisis periods have a disproportionate effect on young banks regardless of their efficiency levels and that they do not generate any positive spillover effects on surviving banks in the three years post-crises in spite of some reallocation benefits in favor of new entry banks. Our findings highlight that forms of prudential regulation designed to strengthen bank resilience in good times might contribute to mitigating the effects of crisis on the longer-term productivity of the banking industry.
Measuring the Accuracy of Federal Reserve Forecasts
Lillian Gaeto & Sandeep Mazumder
Southern Economic Journal, January 2019, Pages 960-984
Abstract:
Markets across the world pay enormous attention to every economic forecast made by Federal Reserve governors, particularly those from the chair. This article develops a new way that the academic literature can assess the accuracy of these Federal Reserve forecasts. In particular, our proposed method allows for both general and specific predictions to be assessed, while also accounting for the macroeconomic volatility that prevails at the time of the forecast. To develop this measure, we expand upon a methodology proposed by the Wall Street Journal to score the accuracy of forecasts made by the Fed. Our results show that Alan Greenspan was consistently the most accurate forecaster among Fed governors, while the most recent chair in our sample, Janet Yellen, has performed relatively poorly. More generally, we find that the chairs have become less accurate over time with their forecasts and have also tended to make fewer specific predictions.
The Rise of Institutional Investment in the Residential Real Estate Market
Rohan Ganduri, Steven Chong Xiao & Serena Wenjing Xiao
Emory University Working Paper, January 2019
Abstract:
This paper examines the recent explosive growth of institutional investment in the single-family-residential markets and its impact on local home prices. Using a quasi-natural experiment in which investors purchased pre-packaged home portfolios, we find that average properties located within 0.25 miles of bulk-sold properties sell for $3,323.25 higher than homes located farther away. The spillover effect is greater for foreclosed homes ($8,494.52), homes with similar size as bulk-sold properties ($3,665.07), and homes in highly distressed neighborhoods ($25,047.81). Our results suggest that while institutional investors conceivably pursue opportunities in distressed real-estate markets, they also provide valuable liquidity which helps recover neighborhood home values.
Dynamism Diminished: The Role of Housing Markets and Credit Conditions
Steven Davis & John Haltiwanger
NBER Working Paper, January 2019
Abstract:
The Great Recession and its aftermath saw the worst relative performance of young firms in at least 35 years. More broadly, as we show, young-firm activity shares move strongly with local economic conditions and local house price growth. In this light, we assess the effects of housing prices and credit supply on young-firm activity. Our panel IV estimation on MSA-level data yields large effects of local house price changes on local young-firm employment growth and employment shares and a separate, smaller role for locally exogenous shifts in bank lending supply. A novel test shows that house price effects work through wealth, liquidity and collateral effects on the propensity to start new firms and expand young ones. Aggregating local effects to the national level, housing market ups and downs play a major role – as transmission channel and driving force – in medium-run fluctuations in young-firm employment shares in recent decades. The great housing bust after 2006 largely drove the cyclical collapse of young-firm activity during the Great Recession, reinforced by a contraction in bank loan supply. As we also show, when the young-firm activity share falls (rises), local employment shifts strongly away from (towards) younger and less-educated workers.
Debt Relief and Slow Recovery: A Decade after Lehman
Tomasz Piskorski & Amit Seru
NBER Working Paper, December 2018
Abstract:
We follow a representative panel of millions of consumers in the U.S. from 2007 to 2017 and document several facts on the long-term effects of the Great Recession. There were about six million foreclosures in the ten-year period after Lehman’s collapse. Owners of multiple homes accounted for 25% of these foreclosures, while comprising only 13% of the market. Foreclosures displaced homeowners, with most of them moving at least once. Only a quarter of foreclosed households regained homeownership, taking an average four years to do so. Despite massive stimulus and debt relief policies, recovery was slow and varied dramatically across regions. House prices, consumption and unemployment remain below pre-crisis levels in about half of the zip codes in the U.S. Regions that recovered to pre-crisis levels took on average four to five years from the depths of the Great Recession. Regional variation in the extent and speed of recovery is strongly related to frictions affecting the pass-through of lower interest rates and debt relief to households including mortgage contract rigidity, refinancing constraints, and the organizational capacity of intermediaries to conduct loan renegotiations. A simple counterfactual based on our estimates suggest that, regardless of the narratives of the causes of housing boom and bust, alleviating these frictions could have reduced the relative foreclosure rate by more than half and resulted in up to twice as fast recovery of house prices, consumption, and employment. Our findings have implications for mortgage market design, monetary policy pass-through, and macro-prudential and housing policy interventions.
Teachers Teaching Teachers: The Role of Workplace Peer Effects in Financial Decisions
Gonzalo Maturana & Jordan Nickerson
Review of Financial Studies, forthcoming
Abstract:
This paper studies the role of workplace peers in the transmission of information pertinent to an important household financial decision: the mortgage refinancing choice. Exploiting commonalities in teaching schedules of school teachers in Texas to identify peer groups, we find that refinancing activity among teachers’ peers increases their likelihood of refinancing by 20.7%. The effect of peers increases with the potential savings realized upon refinancing and is stronger among younger teachers. Peers also affect teachers' choice of lender. Overall, our findings suggest that peer interactions greatly reduce a household's cost of acquiring and processing financial information.