Moneyed
Financial Frictions and Changing Macroeconomic Volatility
Richard Higgins
Journal of Macroeconomics, forthcoming
Abstract:
This paper studies the impact of changing financial frictions on the Great Moderation using an estimated, nonlinear New Keynesian model. The model features financial frictions, parameter drift, and stochastic volatility. The estimation results show that financial frictions fell during the 1980s and remained low throughout the Great Moderation. Based on counterfactual studies, the reduction in financial frictions was an important reason for the reduction in volatility observed during the Great Moderation. The results show little role for changing monetary policy or reduced shock volatility, two common explanations, in causing the Great Moderation.
Bank Stress Testing: Public Interest or Regulatory Capture?
Thomas Ian Schneider, Philip Strahan & Jun Yang
NBER Working Paper, March 2020
Abstract:
We test whether measures of potential influence on regulators affect stress test outcomes. The large trading banks – those most plausibly ‘Too big to Fail’ – face the toughest tests. In contrast, we find no evidence that either political or regulatory connections affect the tests. Stress tests have a greater effect on the value of large trading banks’ portfolios; the large trading banks respond by making more conservative capital plans; and, despite their more conservative capital plans, the large trading banks still fail their tests more frequently than other banks. These results are consistent with a public-interest view of regulation, not regulatory capture.
The Financial Origins of the Rise and Fall of American Inflation
Itamar Drechsler, Alexi Savov & Philipp Schnabl
University of Pennsylvania Working Paper, February 2020
Abstract:
We propose and test a new explanation for the rise and fall of the Great Inflation, a defining event in macroeconomics. We argue that its rise was due to the imposition of binding deposit rate ceilings under the law known as Regulation Q, and that its fall was due to the removal of these ceilings once the law was repealed. Deposits were the dominant form of saving at the time, hence Regulation Q suppressed the return to saving. This drove up aggregate demand, which pushed up inflation and further lowered the real return to saving, setting off an inflation spiral. The repeal of Regulation Q broke the spiral by sending deposit rates sharply higher. We document that the rise and fall of the Great Inflation lines up closely with the imposition and repeal of Regulation Q and the enormous changes in deposit rates and quantities it produced. We further test this explanation in the cross section using detailed data on local deposit markets and inflation. By exploiting four different sources of geographic variation, we show that the degree to which Regulation Q was binding has a large impact on local inflation, consistent with the hypothesis that Regulation Q explains the observed variation in aggregate inflation. We conclude that in the presence of financial frictions the Fed may be unable to control inflation regardless of its policy rule.
Do Credit Card Companies Screen for Behavioural Biases?
Hong Ru & Antoinette Schoar
MIT Working Paper, February 2020
Abstract:
Using granular data on the contract terms and design details of more than 1.3 million credit card offers, we document how card issuers shroud unappealing, back-loaded features of an offer (e.g., high default APRs, late or over-limit fees) via the position of the information, font size, or complexity of the language used. More heavily shrouded offers that rely on back-loaded fees are also more likely to be offered to less-educated consumers. In addition, we document a novel interaction between behavioral screening and adverse selection: Using changes in state-level unemployment insurance (UI) as positive shocks to consumer creditworthiness, we show that issuers rely more on shrouded and back-loaded fees when UI increases, especially for less-educated consumers. Card issuers weigh short-term rent maximization against increased credit risk when targeting consumers' behavioral biases.
Banking without Deposits: Evidence from Shadow Bank Call Reports
Erica Jiang et al.
NBER Working Paper, March 2020
Abstract:
Is bank capital structure designed to extract deposit subsidies? We address this question by studying capital structure decisions of shadow banks: intermediaries that provide banking services but are not funded by deposits. We assemble, for the first time, call report data for shadow banks which originate one quarter of all US household debt. We document five facts. (1) Shadow banks use twice as much equity capital as equivalent banks, but are substantially more leveraged than non-financial firms. (2) Leverage across shadow banks is substantially more dispersed than leverage across banks. (3) Like banks, shadow banks finance themselves primarily with short-term debt and originate long-term loans. However, shadow bank debt is provided primarily by informed and concentrated lenders. (4) Shadow bank leverage increases substantially with size, and the capitalization of the largest shadow banks is similar to banks of comparable size. (5) Uninsured leverage, defined as uninsured debt funding to assets, increases with size and average interest rates on uninsured debt decline with size for both banks and shadow banks. Modern shadow bank capital structure choices resemble those of pre-deposit-insurance banks both in the U.S. and Germany, suggesting that the differences in capital structure with modern banks are likely due to banks’ ability to access insured deposits. Our results suggest that banks’ level of capitalization is pinned down by deposit subsidies and capital regulation at the margin, with small banks likely to be largest recipients of deposit subsidies. Models of financial intermediary capital structure then have to simultaneously explain high (uninsured) leverage, which increases with the size of the intermediary, and allow for substantial heterogeneity across capital structures of firms engaged in similar activities. Such models also need to explain high reliance on short-term debt of financial intermediaries.
Creditor Rights, Technology Adoption, and Productivity: Plant-Level Evidence
Nuri Ersahin
Review of Financial Studies, forthcoming
Abstract:
I use U.S. Census microdata to analyze the effect of stronger creditor rights on productivity. Following the adoption of antirecharacterization laws that give lenders greater access to the collateral of firms in financial distress, treated plants' total factor productivity increases by 2.6%. This effect is concentrated among plants belonging to financially constrained firms. I explore the underlying mechanism and find that treated plants change the composition of their investments and their workforce toward newer capital and skilled labor. My results suggest that stronger creditor rights relax borrowing constraints and help firms adopt more efficient production technologies.
Financial Institution Objectives & Auto Loan Pricing: Evidence from the Survey of Consumer Finances
Jordan van Rijn, Shuwei Zeng & Paul Hellman
University of Wisconsin Working Paper, March 2020
Abstract:
Prior studies of interest rate differentials between nonprofit financial cooperatives (“credit unions”) and for-profit commercial banks generally find that credit unions offer lower loan rates and higher deposit rates. However, these studies likely suffer from selection bias since they rely on data at the level of the financial institution or branch which cannot account for demand-side (individual or household) or loan-level characteristics. We use household-level data from the Survey of Consumer Finances from 2001 to 2016 to compare auto loan rates for households that borrow from credit unions, banks and other financial institutions (captive lenders and auto finance companies). This allows us to control for important household- and loan-level characteristics, such as income, net-worth, education, age, marital status, ethnicity, home ownership, employment status, credit card utilization, household debt, prior bankruptcies and delinquencies, and loan term and amount. We find that — after accounting for these household- and loan-level characteristics, and loan origination year fixed effects — households that receive new auto loans from credit unions pay 0.75 percentage points less on interest rates for new vehicles — and 1.47 percentage points less on used vehicles — relative to households that receive auto loans from banks. The credit union-bank interest rate differential is generally smaller than naïve estimates using institution-level interest rate data but remains statistically significant and economically meaningful. We provide a back-of-the-envelope estimate of the aggregated savings to households that borrow from credit unions relative to banks and find that the savings from auto loans alone are larger than the entire value of the estimated credit union tax exemption. Therefore, we argue that credit unions charge lower auto loan rates due to both lower income taxes and their member-oriented objectives as nonprofit cooperatives. We argue that alternative explanations for lower rates at credit unions — such as the extent of indirect auto lending, auto refinancing, informational advantages, and cross-subsidization across loan products and services — are unlikely to explain the results.
Role of the Community Reinvestment Act in Mortgage Supply and the U.S. Housing Boom
Vahid Saadi
Review of Financial Studies, forthcoming
Abstract:
This paper studies the role of the Community Reinvestment Act (CRA) in the U.S. housing boom-bust cycle. I find that enhanced CRA enforcement in 1998 increased the growth rate of mortgage lending by CRA-regulated banks to CRA-eligible census tracts. I show that during the boom period house price growth was higher in the eligible census tracts because of the shift in mortgage supply of regulated banks. Consequently, these census tracts experienced a worse housing bust. I find that CRA-induced mortgages were awarded to borrowers with lower FICO scores and were more frequently delinquent.
Per-Customer Quantity Limit and Price Discrimination: Evidence from the U.S. Residential Mortgage Market
Chao Ma
International Journal of Industrial Organization, forthcoming
Abstract:
Theoretically, if firms face a regulatory per-customer quantity limit, they should have an incentive to discriminatively charge high-demand customers higher prices and make them just willing to buy a quantity equal to the limit. In the U.S. residential mortgage industry, mortgages with origination balances above the conforming loan limits cannot be guaranteed by Government-Sponsored Enterprises, which make lenders face a per-customer quantity limit. This paper finds that borrowers bunching at the limit pay higher interest rates due to price discrimination. This study rules out the alternative explanation that those borrowers are of higher risk (lending cost) than other borrowers.
Global networks on the way up and the way down: Lessons from the rise and fall of the Seychelles as an offshore financial centre
Justin Robertson
Global Networks, forthcoming
Abstract:
Over the last two decades, the Seychelles quietly rose into the top echelon of the global offshore industry and then it experienced a sharp decline. Two different global networks contributed to this outcome. A global advisory network welcomed the Seychelles into its fold before a global banking network that controls access to US dollar transactions constricted its ties with the country. The larger significance is threefold. First, attention must be paid to global networks as both facilitating neoliberal globalization and as partially recoiling from it. Second, networks oriented around US dollar clearing banks and offshore advisers should be studied closely given the power that comes from their gatekeeper roles. Third, a development strategy founded on offshore business can run aground when faced with tightening global networks and a wavering domestic commitment. The result of these developments is a two‐track offshore economy with a downward path in some jurisdictions but greater continuity in other parts of the offshore system.