Technological change, financial innovation, and diffusion in banking
This paper discusses the technological change and financial innovation that commercial banking has experienced during the past twenty-five years. The paper first describes the role of the financial system in economies and how technological change and financial innovation can improve social welfare. We then survey the literature relating to several specific financial innovations, which we define as new products or services, production processes, or organizational forms. We find that the past quarter century has been a period of substantial change in terms of banking products, services, and ...
Empirical studies of financial innovation: lots of talk, little action?
This paper reviews the extant empirical studies of financial innovation. Adopting broad criteria, the authors found just two dozen studies, over half of which (fourteen) had been conducted since 2000. Since some financial innovations are examined by more than one study, only fourteen distinct phenomena have been covered. Especially striking is the fact that only two studies are directed at the hypotheses advanced in many broad descriptive articles concerning the environmental conditions (e.g., regulation, taxes, unstable macroeconomic conditions, and ripe technologies) spurring financial ...
The 2008 federal intervention to stabilize Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac are government-sponsored enterprises that play a central role in U.S. residential mortgage markets. In recent years, policymakers became increasingly concerned about the size and risk-taking incentives of these two institutions. In September 2008, the federal government intervened to stabilize Fannie Mae and Freddie Mac in an effort to ensure the reliability of residential mortgage finance in the wake of the subprime mortgage crisis. This paper describes the sources of financial distress at Fannie Mae and Freddie Mac, outlines the measures taken by the federal ...
The Federal Home Loan Bank System: the lender of next-to-last resort?
The Federal Home Loan Bank (FHLB) System is a large, complex, and understudied government-sponsored liquidity facility that currently has more than $1 trillion in secured loans outstanding, mostly to commercial banks and thrifts. This paper first documents the significant role played by the FHLB System at the outset of the ongoing financial crisis and then provides evidence about the uses of these funds by their bank and thrift members. We then identify the trade-offs faced by FHLB member-borrowers when choosing between accessing the FHLB System or the Federal Reserve's discount window during ...
Are the Largest Banking Organizations Operationally More Risky?
This study demonstrates that, among large U.S. bank holding companies (BHCs), the largest ones are exposed to more operational risk. Specifically, they have higher operational losses per dollar of total assets, a result largely driven by the BHCs' failure to meet professional obligations to clients and/or faulty product design. Operational risk at the largest U.S. institutions is also found to: (i) be particularly persistent, (ii) have a counter-cyclical component (higher losses occur during economic downturns) and (iii) materialize through more frequent tail-risk events. We illustrate two ...
Federal Home Loan Bank advances and commercial bank portfolio composition
The primary mission of the 12 cooperatively owned Federal Home Loan Banks (FHLBs) is to provide their members financial products and services to assist and enhance member housing finance. In this paper, we consider the role of the FHLBs' traditional product--"advances," or collateralized loans to members--in stabilizing commercial bank members' residential mortgage lending activities. ; Our theoretical model shows that using membership criteria (such as a minimum of 10 percent of the portfolio being in mortgage-related assets) or using mortgage-related assets as collateral does not ensure ...
Regulating housing GSEs: thoughts on institutional structure and authorities
Many of the benefits that the housing government-sponsored enterprises (GSEs) transmit to homebuyers stem from an implied federal guarantee arising from the GSEs? charter benefits and past supervisory forbearance. But this implicit guarantee also represents a risk to taxpayers if one of these GSEs?Fannie Mae, Freddie Mac, or the Federal Home Loan Bank (FHLB) System?becomes insolvent and the government provides financial assistance. ; In the wake of a $5 billion accounting restatement by Freddie Mac in 2003, concerns about taxpayer liability associated with the housing GSEs have led to various ...
Emerging competition and risk-taking incentives at Fannie Mae and Freddie Mac
This paper examines two major forces that may soon increase competition in the U.S. secondary conforming mortgage market: (1) the expansion of Federal Home Loan Bank mortgage purchase programs and (2) the adoption of revised risk-based capital requirements for large U.S. banks (Basel II). The authors argue that this competition is likely to reduce the growth and relative importance of Fannie Mae and Freddie Mac and hence their franchise values and effective capital. Such developments could, in turn, lead to more risky behaviors by these two GSEs. It is this last consequence that warrants ...
Commercial lending distance and historically underserved areas
We study recent changes in the geographic distances between small businesses and their bank lenders, using a large random sample of loans guaranteed by the Small Business Administration. Consistent with extant research, we find that small borrower-lender distances generally increased between 1984 and 2001, with a rapid acceleration in distance beginning in the late-1990s. We also document a new phenomenon: a fundamental reordering of borrower-lender distance by the borrowers' neighborhood income and race characteristics. Historically, borrower-lender distance tended to be shorter than average ...
Fed’s Mortgage-Backed Securities Purchases Sought Calm, Accommodation During Pandemic
We explore the Federal Reserve’s purchases of agency MBS—mortgage bonds guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac—and related market dynamics during the pandemic, including why mortgage rates fell to historic lows.