Did prepayments sustain the subprime market?
This paper demonstrates that the reason for widespread default of mortgages in the subprime market was a sudden reversal in the house price appreciation of the early 2000's. Using loan-level data on subprime mortgages, we observe that the majority of subprime loans were hybrid adjustable rate mortgages, designed to impose substantial financial burden on reset to the fully indexed rate. In a regime of rising house prices, a financially distressed borrower could avoid default by prepaying the loan and our results indicate that subprime mortgages originated between 1998 and 2005 had extremely ...
Corporate response to distress: evidence from the Asian financial crisis
This paper provides a comprehensive examination of the ways in which companies respond to a country-wide crisis through the restructuring of their assets (through asset sales, mergers or liquidations) or liabilities. We find the restructuring of liabilities to be the most common type of response. On the other hand, we argue that firms may be reluctant to engage in major asset sales due to substantial price discounts that need to be applied to these transactions during the crisis. In fact, we document that transaction multiples dropped by 40% during the crisis, compared to a pre-crisis period. ...
Lending to uncreditworthy borrowers
This paper models entry and competition in "high-risk" credit markets. An incumbent lender's advantage over any outside bank derives from its knowledge of (i) the risk profile of its (creditworthy) clients and (ii) uncreditworthy types in the borrower population. Screening is costly and the uninformed lender's ability to use collateral as a screening mechanism depends on its cost advantage over its informed rival. Nevertheless, the outside bank can pool uncreditworthy borrowers with creditworthy types, but only if it has a low cost of funds. Therefore, while a secular decline in the cost of ...
Foreign entry and bank competition
Foreign entry and bank competition are modeled as the interaction between asymmetrically informed principals: the entrant uses collateral as a screening device to contest the incumbent's informational advantage. Both better information ex ante and stronger legal protection ex post are shown to facilitate the entry of low-cost outside competitors into credit markets. The entrant's success in gaining borrowers of higher quality by offering cheaper loans increases with its efficiency (cost) advantage. This paper accounts for evidence suggesting that foreign banks tend to lend more to large firms ...
Household financial stress declines in the Eighth District
Flight to safety and U.S. Treasury securities
As in most crises, investors turned to Treasuries in droves over the past couple of years, even as yields declined.
A look at credit default swaps and their impact on the European debt crisis
Did you know that buying a credit default swap can be like buying insurance on your neighbor?s car?and then getting paid when that neighbor has an accident? Learn the ABCs of CDS, and find out why they are so important to any discussion of the European debt crisis.
Is shadow banking really banking?
To those who don't know, the term "shadow banking" probably has a negative connotation. This primer draws parallels between what has been termed the shadow banking sector and the traditional banking sector?showing that they are similar in many ways.
Household financial stress and home prices
Emerging markets: a source of and destination for capital
Increasingly, emerging markets are becoming a source of growth in the global economy. For example, foreign direct investment both into and out of these countries has shown a phenomenal increase since 2000.