Knowledge that Transforms

This paper adopts a novel approach to examine the roles of gender difference and intra-household economic power in mortgage signing order. We develop an “economic power” index based on relative economic power within the same-sex couple households. We then use this measure along with gender identity and other factors to explain signing order in different-gender couples. Our results suggest that, while pure economic power explains much of the observed signing order, gender difference plays an important role. Analysis exploiting regional variation reveals that gender difference in signing order is greater in states with a larger gender wage gap and red states whose residents predominantly vote for the Republican.

The Dodd–Frank Act created differential regulatory requirements for banks above specified asset size thresholds. Event study results imply greater expected net regulatory costs for above-threshold banks. Consistent with hypotheses that near-below-threshold banks alter their behavior to attempt to avoid or delay the regulatory costs and/or to ensure growth that they do experience is highly beneficial, we find that near-below-threshold banks grow assets, risk-weighted assets, and total loans more slowly, and charge higher rates on commercial loans. The results suggest that the Dodd–Frank Act created costs that near-below-threshold banks attempt to avoid by altering their behaviors in economically important ways.

Does an increase in competition increase or decrease bank stability? I use a novel way to capture changes in banking competition by exploring how the exogenous state-specific process of banking deregulation gradually lowered entry barriers into urban banking markets. I find that the increase in market contestability significantly improves bank stability. This result is robust to the inclusion of additional fixed effects and other influences, such as mergers and acquisitions, or geographic expansion. Moreover, I find that greater competition reduces banks’ failure probability, share of non-performing loans and increases profitability. These findings suggest that competition increases stability, as it improves bank profitability and asset quality.

By exploiting state-level variations in mortgage broker licensing regulations, we examine how licensing requirements affect mortgage loan performances and the mortgage origination market. Using data on private label securitized loans, we find that loans in states with a toughened broker licensing had a smaller increase in default rates. This effect is larger in the years leading up to the financial crisis, for borrowers with lower credit scores, cash-out-refinance loans, high-minority neighborhoods, and loans originated by nonbanks. The improved performance with toughened broker licensing is only partially reflected in loan pricing. Stronger broker licensing requirements have slightly positive effects on the mortgage approval rates, and are associated with overall less risky borrowers and loan characteristics in applications and in originations.

The Credit Card Accountability and Disclosure Act (CARD Act) of 2009 restricted several risk management practices of credit card issuers. Using a quasi-experimental design with credit bureau data on consumer lending, we find evidence consistent with the hypothesis that the act's restrictions on risk management practices contributed to a large decline in bank card holding by higher risk, nonprime consumers but had little effect on prime consumers. Looking at consumer finance loans, historically a source of credit for higher risk consumers, we find greater reliance on such loans by nonprime consumers in states with high consumer finance rate ceilings following the CARD Act than by nonprime consumers in states with low rate ceilings or by prime consumers. That nonprime consumers in states with high consumer finance rate ceilings relied more heavily on consumer finance loans suggests that consumer finance loans were a substitute for subprime credit cards for risky consumers when rate ceilings permit such loans to be profitable. Consumer finance loans would not be available to many higher risk, nonprime consumers in low rate states because such loans would be unprofitable, and prime consumers would not need consumer finance loans because other less expensive types of credit would generally be available to them.

We estimate the causal effect of liquidity regulation on bank balance sheets. We take advantage of the heterogeneous implementation of tighter liquidity regulation by the UK Financial Services Authority in 2010. We find that banks adjusted the composition of both assets and liabilities, increasing the share of high quality liquid assets and non-financial deposits while reducing intra-financial loans and short-term wholesale funding. We do not find evidence that the tightening of liquidity regulation caused banks to shrink their balance sheets, nor reduce the amount of lending to the non-financial sector.

While simpler than risk-based capital requirements, the leverage ratio may encourage bank risk-taking. This paper examines the activity of broker-dealers affiliated with bank holding companies (BHCs) and broker-dealers not affiliated with BHCs in the repurchase agreement (repo) market to test whether this may be occurring. Using data on the triparty repo market, the paper arrives at three findings. First, following the 2012 introduction of the supplementary leverage ratio (SLR), broker-dealer affiliates of BHCs decreased their repo borrowing but increased their use of repo backed by more price-volatile collateral. Second, the paper finds that regardless of whether a U.S. BHC-affiliated broker-dealer parent is above or below the SLR requirement, the announcement of the SLR rule has disincentivized those dealers affiliated with BHCs from borrowing in triparty repo. Finally, the paper finds an increase in the number of active nonbank-affiliated dealers in certain asset classes of triparty repo since the 2012 introduction of the supplementary leverage ratio. This illustrates how regulation can have competitive effects on the financial sector and may result in activities shifting among financial firms.

In this paper, we use credit rating data from two large Swedish banks to elicit evidence on banks’ loan monitoring ability. For these banks, our tests reveal that banks’ internal credit ratings indeed include valuable private information from monitoring, as theory suggests. Banks’ private information increases with the size of loans. However, our tests also reveal that publicly available information from a credit bureau is not efficiently impounded in the bank ratings: credit bureau ratings predict future movements in bank ratings and improve forecasts of both bankruptcy and loan default. The inefficiency of bank ratings is greater for smaller loans. We investigate possible explanations for these findings. Our results are consistent with bank loan officers placing too much weight on their private information, a form of overconfidence. Risk analyses of the loan portfolios in our data could thus be improved by combining the bank credit ratings with public credit bureau ratings. The methods we use represent a new basket of straightforward techniques that enable both financial institutions and regulators to assess the performance of credit rating systems.

We study the impact of exogenous funding shocks to German savings banks during the U.S. subprime mortgage crisis on the labor decisions of 30,000 + private and public firms in Germany. We find that firms with credit relationships with affected banks experience a significant decline in labor demand relative to firms with credit relationships with healthy banks, manifested in a simultaneous reduction in firm-level employment and average wages. The employment effect is more pronounced in larger firms, while the wage effect is stronger in smaller firms. Both employment and wages go back to pre-shock levels three years after the shock.

We conduct an experiment to determine whether market structure affects financial intermediary behavior. The intermediaries (Agents) are perfectly informed regarding project types and can recommend that their clients (Principals) either proceed or discontinue a project. Intermediaries earn revenues only when they recommend proceeding with the transaction. Thus, our design captures some of the incentives faced by financial advisers in commercial banks, where compensation depends on sales performance, and also by money-managers, whose income depends on the size of their portfolios. We find that a monopolist intermediary protects the interest of clients better than when intermediaries compete. Our results are robust to a significant fee increase and provide additional evidence on the impact of market structure on individual incentives and equilibrium outcomes.