Findings

Reserves

Kevin Lewis

July 09, 2019

Growing up without finance
James Brown, Anthony Cookson & Rawley Heimer
Journal of Financial Economics, forthcoming

Abstract:
Early life exposure to local financial institutions increases household financial inclusion and leads to long-term improvements in consumer credit outcomes. We identify the effect of local financial markets using Congressional legislation that led to unintended differences in financial market development across Native American reservations. Individuals from financially underdeveloped reservations enter consumer credit markets later, and upon reaching adulthood, have ten point lower credit scores and four percentage point more delinquent accounts. These effects are long-lived and depreciate slowly after individuals move to more developed areas. Formative exposures to local banking improve consumer credit behavior by increasing financial literacy and financial trust.


Is the fox guarding the henhouse? Bankers in the Federal Reserve, bank leverage and risk-shifting
Ivan Lim, Jens Hagendorff & Seth Armitage
Journal of Corporate Finance, forthcoming

Abstract:
Nearly 30% of US banks employ at least one board member who currently serves (or has previously served) the Federal Reserve in a public service role. Public service roles take the form of Federal Reserve directorships or memberships in Federal Reserve advisory councils. We show that connections between banks and the Federal Reserve are linked to decreases in the sensitivity of bank leverage to risk. Further, connected banks extract larger public subsidies by shifting risk to the financial safety-net. Jointly, our results suggest that interactions between banks and regulators reduce supervisory effectiveness.


Consumer-Lending Discrimination in the FinTech Era
Robert Bartlett et al.
NBER Working Paper, June 2019

Abstract:
Discrimination in lending can occur either in face-to-face decisions or in algorithmic scoring. We provide a workable interpretation of the courts’ legitimate-business-necessity defense of statistical discrimination. We then estimate the extent of racial/ethnic discrimination in the largest consumer-lending market using an identification afforded by the pricing of mortgage credit risk by Fannie Mae and Freddie Mac. We find that lenders charge Latinx/African-American borrowers 7.9 and 3.6 basis points more for purchase and refinance mortgages respectively, costing them $765M in aggregate per year in extra interest. FinTech algorithms also discriminate, but 40% less than face-to-face lenders. These results are consistent with both FinTech and non-FinTech lenders extracting monopoly rents in weaker competitive environments or profiling borrowers on low-shopping behavior. Such strategic pricing is not illegal per se, but under the law, it cannot result in discrimination. The lower levels of price discrimination by algorithms suggests that removing face-to-face interactions can reduce discrimination. Further silver linings emerge in the FinTech era: (1) Discrimination is declining; algorithmic lending may have increased competition or encouraged more shopping with the ease of platform applications. (2) We find that 0.74-1.3 million minority applications were rejected between 2009 and 2015 due to discrimination; however, FinTechs do not discriminate in loan approval.


Bank-Branch Supply, Financial Inclusion, and Wealth Accumulation
Claire Celerier & Adrien Matray
Review of Financial Studies, forthcoming

Abstract:
This paper studies how financial inclusion affects wealth accumulation. Exploiting the U.S. interstate branching deregulation between 1994 and 2005, we find that an exogenous expansion of bank branches increases low-income household financial inclusion. We then show that financial inclusion fosters household wealth accumulation. Relative to their unbanked counterparts, banked households accumulate assets in interest-bearing accounts, invest more in durable assets, such as vehicles, have a better access to debt, and have a lower probability of facing financial strain. The results suggest that promoting financial inclusion for low-income populations can improve household wealth accumulation and financial security.


State Attorneys General & Lender Behavior
Brian Feinstein, Chen Meng & Manisha Padi
University of Pennsylvania Working Paper, May 2019

Abstract:
The Dodd-Frank Act empowers state attorneys general to enforce, with limited exception, both state and federal laws concerning predatory lending, unfair and deceptive practices, information disclosure, and mortgage servicing. During the debate over Dodd-Frank’s passage, the Act’s drafters argued that these dual-enforcement provisions provided a safeguard: should the federal government scale back its consumer-protection activity, the states could help fill the void. Dodd-Frank’s critics, however, warned that the placement of this substantial enforcement authority in the hands of partisan attorneys general could subject lenders to inconsistent law-on-the-ground within a given state, as successive attorneys general - each with his or her own party-driven priorities - enter office. This Article puts this critique to the test. Viewing lenders’ observed behavior as a window into their expectations about enforcement levels, we utilize a dataset of every residential mortgage originated between 2004 and 2013 to examine whether lender activity changes following a switch in the partisan identification of a state’s attorney general. We find no evidence that the attorney general’s party has an impact on mortgage markets. When one controls for other factors, lenders’ behavior is not materially different in states with a Republican versus a Democratic serving as attorney general. Essentially, dual enforcement does not mean inconsistent enforcement.


The Red, the Black, and the Plastic: Paying Down Credit Card Debt for Hotels, Not Sofas
Edika Quispe-Torreblanca et al.
Management Science, forthcoming

Abstract:
Using transaction data from a sample of 1.8 million credit card accounts, we provide the first field test of a major prediction of Prelec and Loewenstein’s theory of mental accounting: that consumers will pay off expenditure on transient forms of consumption more quickly than expenditure on durables. According to the theory, this is because the pain of paying can be offset by the future anticipated pleasure of consumption only when money is spent on consumption that endures over time. Consistent with this prediction, we found that repayment of debt incurred for nondurable goods is an absolute 10% more likely than repayment of debt incurred for durable goods. The strength of this relationship is comparable to an increment in 15 percentage points in the credit card annualized percentage rate. Our results have not only managerial implications for the structuring of financial transactions (e.g., that credit card customers should be given the option of paying off specific purchases) but also more general implications for exploiting variations in the pain of paying in incentive schemes aimed at customers and employees.


Assessing the Effectiveness of Financial Coaching: Evidence from the Boston Youth Credit Building Initiative
Alicia Sasser Modestino, Rachel Sederberg & Liana Tuller
Journal of Consumer Affairs, forthcoming

Abstract:
Since the 2008 financial crisis, there has been renewed interest in providing financial education to improve consumer financial decision making, especially among youth. Using a randomized controlled trial, we estimate the causal effects of a financial coaching program for young adults from linked individual‐level administrative credit reports and self‐reported survey responses. Within six months, the treatment group was 10 percentage points more likely to have access to credit compared to the control group. After 18‐months, the average credit score was 26 points higher for the treatment group versus the control group, raising the likelihood of achieving a “good” credit rating by 8 percentage points. Consequently, the treatment group was less likely to rely on alternative financial services and paid lower interest rates on car loans. These impacts are largely driven by improvements in self‐efficacy, offering important insights for policymakers seeking to incorporate financial education into youth workforce development programs.


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