What Drives Buyout Booms and Busts?
Buyout activity by financial investors fluctuates substantially over time. In the United States, peak years result in close to one hundred public-to-private buyout transactions and trough years in as few as ten. The typical buyout is primarily funded by debt, hence the term 'leveraged buyout' (or LBO). As a result, analysis of buyout fluctuations has focused on the availability and cost of debt financing. However, in a recent staff report, we find that the overall cost of capital, rather than debt alone, is the primary driver of buyout activity. We argue that it is the common changes in both ...
The Effect of Fed Funds Rate Hikes on Consumer Borrowing Costs
The target federal funds rate has hovered around zero for nearly a decade, and observers are questioning what effect an increase could have on both the financial markets and the real economy. In this post, we examine the historical reaction of loan rates to target rate increases. Specifically, we examine the interest rates that banks offer on residential mortgages and home equity lines of credit (HELOCs).
How Does Supervision Affect Banks?
Supervisors monitor banks to assess the banks? compliance with rules and regulations but also to ensure that they engage in safe and sound practices (see our earlier post What Do Banking Supervisors Do?). Much of the work that bank supervisors do is behind the scenes and therefore difficult for outsiders to measure. In particular, it is difficult to know what impact, if any, supervisors have on the behavior of banks. In this post, we describe a new Staff Report in which we attempt to measure the impact that supervision has on bank performance. Does more attention by supervisors lead to lower ...
Did the Supervisory Guidance on Leveraged Lending Work?
Financial regulatory agencies issued guidance intended to curtail leveraged lending?loans to firms perceived to be risky?in March of 2013. In issuing the guidance, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation highlighted several facts that were reminiscent of the mortgage market in the years preceding the financial crisis: rapid growth in the volume of leveraged lending, increased participation by unregulated investors, and deteriorating underwriting standards. Our post shows that banks, in ...
The impact of supervision on bank performance
We explore the impact of supervision on the riskiness, profitability, and growth of U.S. banks. Using data on supervisors? time use, we demonstrate that the top-ranked banks by size within a supervisory district receive more attention from supervisors, even after controlling for size, complexity, risk, and other characteristics. Using a matched sample approach, we find that these top-ranked banks that receive more supervisory attention hold less risky loan portfolios and are less volatile and less sensitive to industry downturns, but do not have slower growth or profitability. Our results ...
Macroprudential policy and the revolving door of risk: lessons from leveraged lending guidance
We investigate the U.S. experience with macroprudential policies by studying the interagency guidance on leveraged lending. We find that the guidance primarily impacted large, closely supervised banks, but only after supervisors issued important clarifications. It also triggered a migration of leveraged lending to nonbanks. While we do not find that nonbanks had more lax lending policies than banks, we unveil important evidence that nonbanks increased bank borrowing following the issuance of guidance, possibly to finance their growing leveraged lending. The guidance was effective at reducing ...
Bank heterogeneity and capital allocation: evidence from \\"fracking\\" shocks
This paper empirically investigates banks? ability to reallocate capital. I use unconventional energy development to identify unsolicited deposit inflows and then I estimate how banks allocate these deposits over the recent business cycle. To condition on credit demand, I compare banks? allocations within affected areas over time and in the cross section. When conditions deteriorate, liquid asset allocations increase and loan allocations decrease. Banks with fewer funding sources and higher capital ratios reduce loan allocations more than nearby peers. My results suggest that during adverse ...
When Debts Compete, Which Wins?
When faced with financial hardship, borrowers might choose to repay some debts while falling behind on others?potentially going into default. Such choices provide insight into consumers? spending priorities and can help us better understand the condition of borrowers under financial distress. In this post, we examine how consumers prioritize their default choices. Do consumers under financial stress default on their credit cards first? Or are they more likely to default on their mortgage?
Did Import Competition Boost Household Debt Demand?
In the years preceding the Great Recession, the United States experienced a dramatic rise in household debt and an unprecedented increase in import competition. In a recent staff report, we outline a link between these two seemingly unrelated phenomena. We argue that the displacement of workers exposed to import competition fueled their demand for mortgage credit, which left many households more vulnerable to the eventual downturn in the housing market.
How Is Technology Changing the Mortgage Market?
The adoption of new technologies is transforming the mortgage industry. For instance, borrowers can now obtain a mortgage entirely online, and lenders use increasingly sophisticated methods to verify borrower income and assets. In a recent staff report, we present evidence suggesting that technology is reducing frictions in mortgage lending, such as reducing the time it takes to originate a mortgage, and increasing the elasticity of mortgage supply. These benefits do not seem to come at the cost of less careful screening of borrowers.