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Working Paper
Pipeline Risk in Leveraged Loan Syndication
Leveraged term loans are typically arranged by banks but distributed to institutional investors. Using novel data, we find that to elicit investors' willingness to pay, arrangers expose themselves to pipeline risk: They have to retain larger shares when investors are willing to pay less than expected. We argue that the retention of such problematic loans creates a debt overhang problem. Consistent with this, we find that the materialization of pipeline risk for an arranger reduces its subsequent arranging and lending activity. Aggregate time series exhibit a similar pattern, which suggests ...
Working Paper
Measuring the Impact of Property Insurance Premiums on the Mortgage Market
We document that increases in property insurance premiums reduce mortgage originations. The effect is strongest for the rate refinancing and cash-out refinancing segments. We show that denials associated with increased premiums are significantly more likely attributed to high debt-to-income ratios and insufficient collateral. Across the income spectrum, the effect is concentrated among highly levered borrowers. Our results suggest that increases in property insurance premiums could attenuate the refinancing channel of monetary policy as fewer borrowers are able to take advantage oflower rates.
Discussion Paper
Auto Financing During and After the Great Recession
More than half of auto financing is originated by non-bank finance companies that typically rely on short-term funding markets for their own financing. During the recent financial crisis, disruptions in these short-term financing markets reduced the availability of auto credit to consumers, which contributed to the decline in auto sales.
Discussion Paper
How the Federal Reserve's Central Bank Swap Lines Have Supported U.S. Corporate Borrowers in the Leveraged Loan Market
The cost of borrowing U.S. dollars through foreign exchange (FX) swap markets increased significantly in the beginning of the Covid-19 pandemic in February 2020, indicated by larger deviations from Covered Interest Rate Parity (CIP). CIP deviations narrowed again when the Federal Reserve expanded its swap lines to support U.S. dollar liquidity globally—by enhancing and extending its swap facility with foreign central banks and introducing the new temporary Foreign and International Monetary Authorities (FIMA) repurchase agreement facility.
Newsletter
How central bank swap lines affect the leveraged loan market
The cost of borrowing U.S. dollars through foreign exchange (FX) swap markets increased significantly at the beginning of the Covid-19 pandemic in February 2020, indicated by larger deviations from covered interest rate parity (CIP). CIP deviations narrowed again when the Federal Reserve expanded its swap lines to support U.S. dollar liquidity globally—by enhancing and extending its swap facility with foreign central banks and introducing the new temporary Foreign and International Monetary Authorities (FIMA) repurchase agreement facility for foreign and international monetary authorities. ...
Working Paper
The Real Effects of Credit Line Drawdowns
Do firms use credit line drawdowns to finance investment? Using a unique dataset of 467 COMPUSTAT firms with credit lines, we study the purpose of drawdowns during the 2007-2009 financial crisis. Our data show that credit line drawdowns had already increased in 2007, precisely when disruptions in bank funding markets began to squeeze aggregate liquidity. Consistent with theory, our results confirm that firms use drawdowns to sustain investment after an idiosyncratic liquidity shock. Using an instrumental variable approach based on institutional features of credit line contracts, we find that ...
Newsletter
How Central Bank Swap Lines Affect the Leveraged Loan Market
The cost of borrowing U.S. dollars through foreign exchange (FX) swap markets increased significantly at the beginning of the Covid-19 pandemic in February 2020, indicated by larger deviations from covered interest rate parity (CIP). CIP deviations narrowed again when the Federal Reserve expanded its swap lines to support U.S. dollar liquidity globally—by enhancing and extending its swap facility with foreign central banks and introducing the new temporary Foreign and International Monetary Authorities (FIMA) repurchase agreement facility for foreign and international monetary authorities. ...