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Are the Borrowing Costs of Large Financial Firms Unusual?
Estimates of investor expectations of government support of large financial firms are often based on large financial firms' lower borrowing costs relative to smaller financial firms. Using pricing data on credit default swaps (CDS) and corporate bonds over the period 2004 to 2013, however, we find that the CDS and bond spreads of financial firms are no more sensitive to borrower size than the spreads of non-financial firms. Outside of the financial crisis period, spreads are more sensitive to borrower size in several non-financial industries. We find that size-related differences in spreads ...
Made poorer by choice: worker outcomes in Social Security v. private retirement accounts
Can the freedom to choose how retirement funds are invested leave workers worse off? We analyze social risks of allowing choice, using the Social Security system as an example. Comparing a privatized alternative with the current system via simulation, we document that choice in both equity allocation and equity composition lead to increased income inequality and risk of shortfalls relative to currently promised benefits. While private accounts disproportionately increase shortfall risk for low-income workers, allowing choice increases risk for all workers (even with high return outcomes). Our ...
Competition in lending and credit ratings
This article relates corporate credit rating quality to competition in lending between the public bond market and banks. In the model, the monopolistic rating agency's choice of price and quality leads to an endogenous threshold separating low-quality bank-dependent issuers from higher-quality issuers with access to public debt. In a baseline equilibrium with expensive bank lending, this separation across debt market segments provides information, but equilibrium ratings are uninformative. A positive shock to private (bank) relative to public lending supply allows banks to compete with public ...