Lots of interest
The Decline in the Natural Rate of Interest
John Williams
Business Economics, April 2015, Pages 57–60
Abstract:
With the Federal Reserve widely expected to begin normalization of monetary policy in the wake of the Great Recession — perhaps in 2015 — an important question for public policy and private-sector planning is what the "new normal" for interest rates is likely to be. In particular, are real interest rates likely to be lower in the future than in recent decades? An investigation through the use of the Kalman filter shows that the natural rate of interest — the real federal funds rate consistent with the economy operating at its full potential — has declined since 1980, especially after the Great Recession. This will have important implications for monetary policy and for the private sector, including recognition that the natural rate of interest is not fixed.
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Political power, economic freedom and Congress: Effects on bank performance
Daniel Gropper, John Jahera & Jung Chul Park
Journal of Banking & Finance, November 2015, Pages 76–92
Abstract:
This paper studies the linkages between bank performance, connections to powerful politicians, and the degree of economic freedom in a bank's home state. We find that bank performance is positively related to state economic freedom. We also reconfirm the finding of Gropper et al. (2013) that bank performance is improved by political connections. However, the positive effect of political connections appears to be significantly reduced when there is a higher degree of economic freedom in the state, indicating that political connections may matter less to banks when there is more economic freedom. Economic freedom in a state can have a beneficial effect on the state economic growth and hence may outweigh any political connection benefits. However, the declines in state economic freedom in recent years could make political connections potentially more valuable to banks.
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Discount Window Stigma During the 2007–2008 Financial Crisis
Olivier Armantier et al.
Journal of Financial Economics, forthcoming
Abstract:
We provide empirical evidence for the existence, magnitude, and economic cost of stigma associated with banks borrowing from the Federal Reserve's Discount Window (DW) during the 2007–2008 financial crisis. We find that banks were willing to pay a premium of around 44 basis points (bps) across funding sources (126 bps after the bankruptcy of Lehman Brothers) to avoid borrowing from the DW. DW stigma is economically relevant as it increased some banks' borrowing cost by 32 bps of their pre-tax return on assets (ROA) during the crisis. The implications of our results for the provision of liquidity by central banks are discussed.
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Size, Leverage, and Risk-taking of Financial Institutions
Sanjai Bhagat, Brian Bolton & Jun Lu
Journal of Banking & Finance, October 2015, Pages 520–537
Abstract:
We investigate the link between firm size and risk-taking among financial institutions during the period of 1998-2008 and make three contributions. First, size is positively correlated with risk-taking measures even when controlling for other observable firm characteristics, such as market-to-book value ratio, corporate governance, and ownership structure. This is consistent with the notion that "too-big-to-fail" policies distort the risk incentives of financial institutions. Second, a simple decomposition of the primary risk measure, the Z-score, reveals that financial firms engage in excessive risk-taking mainly through increased leverage. Third, we find that bank corporate governance measured as the median director dollar stockholding has a substantial impact on reducing firms' risk-taking.
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The Impact of Foreclosure Delay on U.S. Employment
Kyle Herkenhoff & Lee Ohanian
NBER Working Paper, September 2015
Abstract:
This paper documents that the time required to initiate and complete a home foreclosure rose from about 9 months on average prior to the Great Recession to an average of 15 months during the Great Recession and afterward. We refer to these changes as foreclosure delay. We also document that many borrowers who are in foreclosure ultimately exit foreclosure and keep their homes by making up for missed mortgage payments. We analyze the impact of foreclosure delay on the U.S. labor market as an implicit credit line from a lender to a borrower (mortgagor) within a search model. In the model, foreclosure delay provides unemployed mortgagors with additional time to search for a high-paying job. We find that foreclosure delay decreases mortgagor employment by about 0.75 percentage points, nearly doubles the stock of delinquent mortgages, increases the rate of homeownership by about 0.3 percentage points, and increases job match quality, as mortgagors search longer. Severe foreclosure delays, such as those observed in Florida and New Jersey, can depress mortgagor employment by up to 1.3 percentage points. The model results are consistent with PSID and SCF data that show that employment rates rise for delinquent mortgagors once the mortgagor is in the foreclosure process.
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Screening Peers Softly: Inferring the Quality of Small Borrowers
Rajkamal Iyer et al.
Management Science, forthcoming
Abstract:
This paper examines the performance of new online lending markets that rely on nonexpert individuals to screen their peers' creditworthiness. We find that these peer lenders predict an individual's likelihood of defaulting on a loan with 45% greater accuracy than the borrower's exact credit score (unobserved by the lenders, who only see a credit category). Moreover, peer lenders achieve 87% of the predictive power of an econometrician who observes all standard financial information about borrowers. Screening through soft or nonstandard information is relatively more important when evaluating lower-quality borrowers. Our results highlight how aggregating over the views of peers and leveraging nonstandard information can enhance lending efficiency.
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Deleveraging and Mortgage Curtailment
Meagan McCollum, Hong Lee & Kelley Pace
Journal of Banking & Finance, November 2015, Pages 60–75
Abstract:
Using monthly loan-level data, individual partial prepayments (curtailments) from January 2001 to June 2011 are observed for mortgages in twenty metropolitan statistical areas. Contrary to some earlier assertions, American homeowners now frequently commit funds towards their mortgage payments in excess of the amount due; over 30% of loans outstanding have made at least one curtailment payment. After controlling for borrower and loan-level variables, we show that the latent propensity to curtail has steadily risen from 2003 to 2006 and remains at elevated levels. Therefore, curtailment provides an example of consumer deleveraging behavior that began prior to the Great Recession.
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Sumit Agarwal et al.
NBER Working Paper, August 2015
Abstract:
We examine the ability of the government to impact mortgage refinancing activity and spur consumption by focusing on the Home Affordable Refinancing Program (HARP). The policy allowed intermediaries to refinance insufficiently collateralized mortgages by extending government credit guarantee on such loans. We use proprietary loan-level panel data from a large market participant with refinancing history and social security number matched consumer credit records of each borrower. A difference-in-difference empirical design reveals a substantial increase in refinancing activity by the program, inducing more than three million eligible borrowers with primarily fixed-rate mortgages – the predominant contract type in the U.S. – to refinance their loans. Borrowers received a reduction of around 140 basis points in interest rate due to HARP refinancing amounting to about $3,500 in annual savings per borrower. More than 20% of interest rate savings from refinancing was allocated to durable (auto) spending, with larger spending response among less wealthy and creditworthy. Regions more exposed to the program saw a relative increase in non-durable and durable consumer spending, a decline in foreclosure rates, and a faster recovery in house prices. A variety of identification strategies reveal that competitive frictions in the refinancing market may have hampered HARP's impact. On average, these frictions reduced take-up rate among eligible borrowers by 10% and cut interest rate savings by 16 basis points, with both these effects being twice as large among the most indebted borrowers. These findings have implications for future policy interventions, pass-through of monetary policy through household balance sheets, and design of the mortgage market.
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Human Capital Risk, Contract Enforcement, and the Macroeconomy
Tom Krebs, Moritz Kuhn & Mark Wright
American Economic Review, forthcoming
Abstract:
We use data from the Survey of Consumer Finance and Survey of Income Program Participation to show that young households with children are under-insured against the risk that an adult member of the household dies. We develop a tractable macroeconomic model with human capital risk, age-dependent returns to human capital investment, and endogenous borrowing constraints due to the limited pledgeability of human capital. We show analytically that, consistent with the life insurance data, in equilibrium young households are borrowing constrained and under-insured. A calibrated version of the model can quantitatively account for the life-cycle variation of life-insurance holdings, financial wealth, earnings, and consumption inequality observed in the US data. Our analysis implies that a reform that makes consumer bankruptcy more costly, like the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, leads to a substantial increase in the volume of both credit and insurance.
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Foreclosures, House Prices, and the Real Economy
Atif Mian, Amir Sufi & Francesco Trebbi
Journal of Finance, forthcoming
Abstract:
From 2007 to 2009, states without a judicial requirement for foreclosures were twice as likely to foreclose on delinquent homeowners. Analysis of borders of states with differing foreclosure laws reveals a discrete jump in foreclosure propensity as one enters nonjudicial states. Using state judicial requirement as an instrument for foreclosures, we show that foreclosures led to a large decline in house prices, residential investment, and consumer demand from 2007 to 2009. As foreclosures subsided from 2011 to 2013, the foreclosure rates in nonjudicial and judicial requirement states converged and we find some evidence of a stronger recovery in nonjudicial states.
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Estimating Changes in Supervisory Standards and Their Economic Effects
William Bassett, Seung Jung Lee & Thomas Spiller
Journal of Banking & Finance, November 2015, Pages 21–43
Abstract:
The disappointingly slow recovery in the U.S. from the depths of the financial crisis once again focused attention on the relationship between financial frictions and economic growth. Some bankers and borrowers suggested that unnecessarily tight supervisory policies were a constraint on new lending that hindered the recovery. This paper explores one aspect of supervisory policy: whether the standards used to assign commercial bank CAMELS ratings have changed materially over time (1991-2013). Models incorporating time-varying parameters or economy-wide variables suggest that standards used in the assignment of CAMELS ratings over the post-crisis period generally were in line with historical experience. Indeed, each of the models used suggests that the variation in supervisory standards has been relatively small in absolute terms over most of the sample period. However, we show that when this measure of supervisory stringency becomes elevated, it has a noticeable dampening effect on lending activity in subsequent quarters.
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Sebastian Kohl
European Journal of Sociology, August 2015, Pages 271-306
Abstract:
Comparative welfare and production regime literature has so far neglected the considerable cross-country differences in the sphere of housing. The United States became a country of homeowners living in cities of single-family houses in the twentieth century. Its housing policy was focused on supporting private mortgage indebtedness with only residual public housing. Germany, on the contrary, remained a tenant-dominated country with cities of multi-unit buildings. Its housing policy has been focused on construction subsidies to non-profit housing associations and incentives for savings earmarked for financing housing. The article claims that these differences are the outcome of different housing institutions that had already emerged in the nineteenth century. Germany developed non-profit housing associations and financed housing through mortgage banks, both privileging the construction of rental apartments. In the United States, savings and loan associations favored mortgages for owner-occupied, single-family house construction. When governments intervened during housing crises in the 1920/1930s, they aimed their subsidies at these existing institutions. Thus, US housing policy became finance-biased in favor of savings and loan associations, while Germany supported the housing cooperatives.
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Banks' Internal Capital Markets and Deposit Rates
Itzhak Ben-David, Ajay Palvia & Chester Spatt
NBER Working Paper, September 2015
Abstract:
A common view is that deposit rates are determined primarily by supply: depositors require higher deposit rates from risky banks, thereby creating market discipline. An alternative perspective is that market discipline is limited (e.g., due to deposit insurance and/or enhanced capital regulation) and that internal demand for funding by banks determines rates. Using branch-level deposit rate data, we find little evidence for market discipline as rates are similar across bank capitalization levels. In contrast, banks' loan growth has a causal effect on deposit rates: e.g., branches' deposit rates are correlated with loan growth in other states in which their bank has some presence, suggesting internal capital markets help reallocate the bank's funding.
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Land Bank 2.0: An Empirical Evaluation
Stephan Whitaker & Thomas Fitzpatrick
Journal of Regional Science, forthcoming
Abstract:
In 2009, Cuyahoga County, Ohio (Cleveland and 58 suburbs), established a land bank to acquire low-value properties, mitigate blighted housing, and slow the decline of property values. This empirical study evaluates the effectiveness of the land bank by estimating spatially corrected hedonic price models using sales near the land-bank homes. The land bank reduces the negative externalities of the properties it acquires. Its largest impact is the preservation of equity in unsold homes. We also estimate the recovered value for homes sold during the study period and the property tax revenue that may have been forgone, absent the land bank.
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Self Control and Commitment: Can Decreasing the Liquidity of a Savings Account Increase Deposits?
John Beshears et al.
NBER Working Paper, August 2015
Abstract:
If individuals have self-control problems, they may take up commitment contracts that restrict their spending. We experimentally investigate how contract design affects the demand for commitment contracts. Each participant divides money between a liquid account, which permits unrestricted withdrawals, and a commitment account with withdrawal restrictions that are randomized across participants. When the two accounts pay the same interest rate, the most illiquid commitment account attracts more money than any of the other commitment accounts. We show theoretically that this pattern is consistent with the presence of sophisticated present-biased agents, who prefer more illiquid commitment accounts even if they are subject to uninsurable marginal utility shocks drawn from a broad class of distributions. When the commitment account pays a higher interest rate than the liquid account, the relationship between illiquidity and deposits is flat, suggesting that agents without present bias and/or naïve present-biased agents are also present in our sample.