Where the money goes
Mortgage-Backed Securities and the Financial Crisis of 2008: A Post Mortem
Juan Ospina & Harald Uhlig
NBER Working Paper, April 2018
Abstract:
We examine the payoff performance, up to the end of 2013, of non-agency residential mortgage-backed securities (RMBS), issued up to 2008. We have created a new and detailed data set on the universe of non-agency residential mortgage backed securities, per carefully assembling source data from Bloomberg and other sources. We compare these payoffs to their ex-ante ratings as well as other characteristics. We establish seven facts. First, the bulk of these securities was rated AAA. Second, AAA securities did ok: on average, their total cumulated losses up to 2013 are 2.3 percent. Third, the subprime AAA-rated segment did particularly well. Fourth, later vintages did worse than earlier vintages, except for subprime AAA securities. Fifth, the bulk of the losses were concentrated on a small share of all securities. Sixth, the misrating for AAA securities was modest. Seventh, controlling for a home price bust, a home price boom was good for the repayment on these securities. Together, these facts provide challenge the conventional narrative, that improper ratings of RMBS were a major factor in the financial crisis of 2008.
Liquidity crises in the mortgage market
You Suk Kim et al.
Federal Reserve Working Paper, February 2018
Abstract:
Nonbanks originated about half of all mortgages in 2016, and 75% of mortgages insured by the FHA or VA. Both shares are much higher than those observed at any point in the 2000s. We describe in this paper how nonbank mortgage companies are vulnerable to liquidity pressures in both their loan origination and servicing activities, and we document that this sector in aggregate appears to have minimal resources to bring to bear in a stress scenario. We show how these exact same liquidity issues unfolded during the financial crisis, leading to the failure of many nonbank companies, requests for government assistance, and harm to consumers. The extremely high share of nonbank lenders in FHA and VA lending suggests that nonbank failures could be quite costly to the government, but this issue has received very little attention in the housing-reform debate.
The Impact of the Dodd-Frank Act on Small Business
Michael Bordo & John Duca
NBER Working Paper, April 2018
Abstract:
There are concerns that the Dodd-Frank Act (DFA) has impeded small business lending. By increasing the fixed regulatory compliance requirements needed to make business loans and operate a bank, the DFA disproportionately reduced the incentives for all banks to make very modest loans and reduced the viability of small banks, whose small-business share of C&I loans is generally much higher than that of larger banks. Despite an economic recovery, the small loan share of C&I loans at large banks and banks with $300 or more million in assets has fallen by 9 percentage points since the DFA was passed in 2010, with the magnitude of the decline twice as large at small banks. Controlling for cyclical effects and bank size, we find that these declines in the small loan share of C&I loans are almost all statistically attributed to the change in regulatory regime. Examining Federal Reserve survey data, we find evidence that the DFA prompted a relative tightening of bank credit standards on C&I loans to small versus large firms, consistent with the DFA inducing a decline in small business lending through loan supply effects. We also empirically model the pace of business formation, finding that it had downshifted around the time when the DFA and the Sarbanes-Oxley Act were announced. Timing patterns suggest that business formation has more recently ticked higher, coinciding with efforts to provide regulatory relief to smaller banks via modifying rules implementing the DFA. The upturn contrasts with the impact of the Sarbanes-Oxley Act, which appears to persistently restrain business formation.
What Insights Do Taxi Rides Offer into Federal Reserve Leakage?
David Finer
University of Chicago Working Paper, April 2018
Abstract:
How do markets learn about central banks? Employing narrative evidence and futures data, Cieślak, Morse and Vissing-Jørgensen (2018) argue that private, informal channels systematically carry Federal Reserve information to markets around monetary-policy meetings. I complement their work with an analysis of potential channels: New York Fed insiders' interactions with commercial bankers. Using taxi data, I find highly statistically significant evidence that late-night meetings at the New York Fed and lunchtime offsite interactions increase around FOMC meetings. These results suggest increased opportunities for Federal Reserve information to flow to markets along informal or discreet channels.
When saving is gambling
Anthony Cookson
Journal of Financial Economics, forthcoming
Abstract:
Prize-linked savings (PLS) accounts, which allocate interest using lottery payments rather than fixed interest, encourage savings by appealing to households’ gambling preferences. I introduce new data on casino cash withdrawals to measure gambling, and examine how individual gambling expenditures respond to the introduction of PLS in Nebraska using a difference-in-differences design. After PLS is introduced, individuals who live in counties that offer PLS reduce gambling by at least 3% more than unaffected individuals. The substitution effect is stronger in low-frills gambling environments, which most resemble PLS, indicating that these accounts fulfill the desire to gamble.
Secular Stagnation: Theory and Remedies
Jean-Baptiste Michau
Journal of Economic Theory, July 2018, Pages 552–618
Abstract:
To investigate secular stagnation, I add two features to a standard Ramsey model with money: (i) Households have a preference for wealth; (ii) Wages are downward rigid. In this framework, there exists a frictionless neoclassical steady state equilibrium characterized by a low natural real interest rate. In addition, if wages are sufficiently rigid and the natural real interest rate sufficiently low, then there also exists a Keynesian secular stagnation steady state characterized by under-employment, low inflation, and a binding zero lower bound on the nominal interest rate. As wages become more flexible, the Keynesian steady state diverges away from the neoclassical steady state, until wages are so flexible that it ceases to exist. If monetary policy is excessively restrictive, then the secular stagnation steady state is the unique steady state equilibrium of the economy. The optimal policy response to secular stagnation is to move the economy to the neoclassical steady state. This can either be achieved by raising the central bank's inflation ceiling or by taxing wealth and subsidizing investment in physical capital. This optimal tax policy is revenue-neutral.
An Event Study Analysis of Too-Big-to-Fail after the Dodd-Frank Act: Who is Too Big to Fail?
Kyle Allen et al.
Journal of Economics and Business, forthcoming
Abstract:
One feature of the Dodd-Frank Act is the elimination of too-big-to-fail (TBTF) banks. TBTF is a government guarantee of large banks that has been shown to increase the value of these banks, so removing the guarantee should result in a price decline of TBTF bank stock. Using event study methods, we find very limited reaction to the process of eliminating TBTF. Specifically, there is limited reaction among the largest banks and banks receiving special attention, such as Systemically Important Financial Institutions (SIFI) banks. Instead, smaller banks not receiving special attention show some evidence of negative returns with the elimination of TBTF.
The Role of Technology in Mortgage Lending
Andreas Fuster et al.
NBER Working Paper, April 2018
Abstract:
Technology-based ("FinTech") lenders increased their market share of U.S. mortgage lending from 2% to 8% from 2010 to 2016. Using market-wide, loan-level data on U.S. mortgage applications and originations, we show that FinTech lenders process mortgage applications about 20% faster than other lenders, even when controlling for detailed loan, borrower, and geographic observables. Faster processing does not come at the cost of higher defaults. FinTech lenders adjust supply more elastically than other lenders in response to exogenous mortgage demand shocks, thereby alleviating capacity constraints associated with traditional mortgage lending. In areas with more FinTech lending, borrowers refinance more, especially when it is in their interest to do so. We find no evidence that FinTech lenders target marginal borrowers. Our results suggest that technological innovation has improved the efficiency of financial intermediation in the U.S. mortgage market.
Do fintech lenders penetrate areas that are underserved by traditional banks?
Julapa Jagtiani & Catharine Lemieux
Journal of Economics and Business, forthcoming
Abstract:
Fintech has been playing an increasing role in shaping financial and banking landscapes. In this paper, we use account-level data from LendingClub and Y-14M data reported by U.S. banks with assets over $50 billion to examine whether the fintech lending platform could expand credit access to consumers. We find that LendingClub’s consumer lending activities have penetrated areas that may be underserved by traditional banks, such as in highly concentrated markets and areas that have fewer bank branches per capita. We also find that the portion of LendingClub loans increases in areas where the local economy is not performing well.
On the Rise of FinTechs - Credit Scoring using Digital Footprints
Tobias Berg et al.
NBER Working Paper, April 2018
Abstract:
We analyze the information content of the digital footprint – information that people leave online simply by accessing or registering on a website – for predicting consumer default. Using more than 250,000 observations, we show that even simple, easily accessible variables from the digital footprint equal or exceed the information content of credit bureau (FICO) scores. Furthermore, the discriminatory power for unscorable customers is very similar to that of scorable customers. Our results have potentially wide implications for financial intermediaries’ business models, for access to credit for the unbanked, and for the behavior of consumers, firms, and regulators in the digital sphere.
Seigniorage in the Civil War South
Bryan Cutsinger & Joshua Ingber
George Mason University Working Paper, March 2018
Abstract:
The story of Confederate public finance is one of large and persistent budget deficits, ballooning debt, skyrocketing inflation, and a debased currency. Given the severity of this situation, it may seem counterintuitive to conclude that the monetary expansion in the South was too conservative. Could it really be the case that the financial failure of the Confederacy was caused by too little monetary expansion? In this paper, we apply insights from the literature on inflationary finance to evaluate the stance of Confederate monetary policy from the perspective of seigniorage maximization. We use three currency reforms to evaluate the effect of monetary contraction on the flow of real seigniorage. Our findings suggest that the South failed to maximize the revenue from seigniorage.