Knowledge that Transforms

Does securitization distort the foreclosure decisions of non-performing mortgages? In a model of mortgage-backed securitization with an endogenous foreclosure policy, we find that the securitizing bank adopts a tougher foreclosure policy than the first-best, despite resulting in higher loan losses. This is optimal because foreclosure mitigates the adverse selection problem in securitization by making the optimal security, a risky debt, less information-sensitive. We further show that policies that limit mortgage foreclosure would discourage the bank’s ex ante screening effort, reducing the quality of securitized mortgages. Our model yields novel testable predictions on the effect of mortgage securitization on foreclosure rates, loan performance, and mortgage servicing.

We investigate whether lenders can realize informational synergies by simultaneously obtaining private information from different accounts of the same borrower. Synergies exist if such information is complementary to each other. We focus on consumer credit, using 3.5 million observations from checking accounts and credit card accounts of the same individuals during 2007–2014. First, activity from both accounts is complementary for estimating consumer default beyond credit scores, borrower characteristics and relationship characteristics. Checking accounts display warning indications about consumer default earlier and more accurately than credit card accounts. Second, decision errors are lower when lenders consider cross-product information. The evidence suggests significant informational synergies that are important for the supply and allocation of credit.

Examining bank behavior around Federal Reserve stress tests, we find that stress test banks increase capital ratios at the starting point for annual stress testing significantly more than non-stress test banks. These trends are completely reversed (and economically significant) in the other quarters. Further, the differences between stress test and non-stress test banks seen in stress test years do not occur in 2010, when the Fed did not conduct a stress test. Results show that, as they enter the stress test, stress test banks lower dividends significantly more than non-stress test banks. Finally, stress test banks spend significantly more on lobbying than non-stress test banks. The results suggest that stress test banks may be managing financial performance and investing in political spending to improve their chances of passing stress tests.

We examine the relation between banks’ liquidity risk and their willingness to supply capital to borrowers under previously committed credit lines. We show that during the collapse of the asset-backed commercial paper (ABCP) market in the last quarter of 2007 and the first half of 2008, banks with higher exposure to ABCP conduits renegotiated significantly tougher conditions on the outstanding credit lines offered to borrowers in violation of a covenant. Specifically, we find that borrowers faced higher spreads over the prime rate and LIBOR as well as higher commitment fees on undrawn amounts. Our paper suggests that an increase in lender liquidity risk can bear financial implications for firms that use credit lines as an instrument of liquidity management.

This paper is a review of the literature on fintech and its interaction with banking. Included in fintech are innovations in payment systems (including cryptocurrencies), credit markets (including P2P lending), and insurance, with Blockchain-assisted smart contracts playing a role. The paper provides a definition of fintech, examines some statistics and stylized facts, and then reviews the theoretical and empirical literature. The review is organized around four main research questions. The paper summarizes our knowledge on these questions and concludes with questions for future research.

We examine the real effects of changes in bank mortgage loan underwriting standards by combining responses to the Federal Reserve’s Senior Loan Officer Opinion Survey, application information from the Home Mortgage Disclosure Act, and local housing market measures over 1990 to 2013. Tightened standards are associated with a 1 percentage point increase in denial rates and a 5% fall in loan issuance, controlling for applicant pool changes, but no change for predominantly-securitizing banks. In areas with more exposure to banks that have tightened standards, mortgage delinquency rates, house prices, new home sales, and residential construction employment fall substantially.

This paper summarises the results of a joint research project by five central banks in Latin America countries (Argentina, Brazil, Colombia, Mexico and Peru) to evaluate the effectiveness of macroprudential tools and their interaction with monetary policy. Using meta-analysis techniques, we summarise the results of a common empirical framework based on confidential bank-loan data. The main conclusions are that (i) macroprudential policies have been quite effective in stabilising credit cycles. The propagation of the effects to credit growth is more rapid for policies aimed at curbing the cycle than for policies aimed at fostering resilience; and (ii) macroprudential tools have a greater effect on credit growth when reinforced by the use of monetary policy.

We investigate the importance of firm-bank relationships for the international transmission of bank distress to the real economy. Using a large panel of matched financial statements of firms of all sizes and their relationship banks in Germany, we find that banks with losses from proprietary trading activities during the 2007/8 financial crisis decreased their lending, and that their firm customers responded by reducing real investment and employment. We document how different types of firms partially offset reduced credit supply by resorting to alternative financing sources.

This paper examines the effect of a regulatory action (the Home Valuation Code of Conduct) that was designed to reduce the incidence of inflated collateral valuations. We identify the impact of the regulation using a difference-in-difference identification strategy. Our baseline results confirm that the regulation reduced inflated valuations in refinance transactions by 16% in the large lender sample, compared to small lenders and a placebo sample. The effect is most significant in low-liquidity and low-distress markets, but not in other markets. We find that the regulation had a significant impact on loan to value ratio and interest rate, and it also led to a significant increase in defaults but a decrease in prepayments.