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Working Paper
Does Differential Treatment Translate to Differential Outcomes for Minority Borrowers? Evidence from Matching a Field Experiment to Loan-Level Data
This paper provides evidence on the relationship between differential treatment of minority borrowers and their mortgage market outcomes. Using data from a field experiment that identifies differential treatment matched to real borrower transactions in the Home Mortgage Disclosure Act (HMDA) data, we estimate difference-in-difference models between African American and white borrowers across lending institutions that display varying degrees of differential treatment. Our results show that African Americans are more likely to be in a high-cost (subprime) loan when borrowing from lenders that are more responsive to them in the field experiment. We also show that net measures of differential treatment are not related to the probability of African American borrowers having a high-cost loan. Our results suggest that differential outcomes are related to within-institution factors, not just across-institution factors like institutional access, as previous studies find.
AUTHORS: Martin, Hal; Hanson, Andrew; Hawley, Zackary
DATE: 2017-03-22

Working Paper
Differential Capital Requirements: Leverage Ratio versus Risk-Based Capital Ratio from a Monitoring Perspective
In this paper, I attempt to amalgamate the study of leverage-ratio performance with the monitoring decisions of a profit-maximizing bank. Applying tools used in studying the industrial organization of banking, my paper serves as a first step to tying the performance differences between the leverage and risk-based constraints to the more fundamental issue of monitoring. Does a bank faced with a leveragebased capital constraint monitor its loans better than a bank under a risk-based capital constraint? In a market that is characterized by a dominant bank and fringe banks, I seek to understand if the dominant bank monitors its loan when faced with a Basel III?style leverage ratio. The results show that under certain parameter ranges, the dominant bank will monitor its portfolio when faced with a leverage-based capital constraint. The results also show that the dominant bank will not monitor its portfolio when faced with a risk-based capital constraint.
AUTHORS: Balasubramanyan, Lakshmi
DATE: 2014-10-02

Working Paper
Stress Tests and Small Business Lending
Post-crisis stress tests have altered banks? credit supply to small business. Banks affected by stress tests reduce credit supply and raise interest rates on small business loans. Banks price the implied increase in capital requirements from stress tests where they have local knowledge, and exit markets where they do not, as quantities fall most in markets where stress-tested banks do not own branches near borrowers, and prices rise mainly where they do. These reductions in supply are concentrated among risky borrowers. Stress tests do not, however, reduce aggregate credit. Small banks increase their share in geographies formerly reliant on stress-tested lenders.
AUTHORS: Cortes, Kristle Romero; Li, Lei; Strahan, Philip E.; Loutskina, Elena; Demyanyk, Yuliya
DATE: 2018-03-01

Working Paper
The Impact of Missed Payments and Foreclosures on Credit Scores
This paper debunks the common perception that ?foreclosure will ruin your credit score.? Using individual-level data from a credit bureau matched with loan-level mortgage data, it is estimated that the very first missed mortgage payment leads to the biggest reduction in credit scores. The effects of subsequent loan impairments are increasingly muted. Post-delinquency foreclosures have only a minimal effect on credit scores. Moreover, credit scores improve substantially a year after borrowers experience 90-day delinquency or foreclosure. The data supports one possible explanation of this improvement: the absence of mortgage payments relaxes the borrowers? budget constraint, allowing them to restore other forms of credit.
AUTHORS: Demyanyk, Yuliya
DATE: 2014-10-27

Working Paper
Can Reputation Ensure Efficiency in the Structured Finance Market? Majority Voting: A Quantitative Investigation
In Elamin (2013), the credit rating agency (CRA) cannot credibly fully reveal its information about the quality of a rated structured finance project, when ratings are unverifiable. Can the fear of losing its reputation discipline the CRA? In this paper, there is incomplete information about the type of the CRA. With some probability, it can be a truthful type, always fully revealing its information. At every period, the (updated) probability that the CRA is of the truthful type is its reputation. With only two project types and when the CRA?s reputation is high enough, an informationally efficient equilibrium, where investors are fully informed, exists. With more than two project types, no matter how high the CRA?s patience level or its reputation, there is no informationally efficient equilibrium. The many-project-types case is clearly the relevant case; therefore, I conclude that the fear of losing a reputation is not enough of a deterrent in the structured finance market
AUTHORS: Elamin, Mahmoud
DATE: 2015-01-07

Working Paper
Global banking and international business cycles
This paper incorporates a global bank into a two-country business-cycle model. The bank collects deposits from households and makes loans to entrepreneurs, in both countries. It has to finance a fraction of loans using equity. We investigate how such a bank capital requirement affects the international transmission of productivity and loan default shocks. Three findings emerge. First, the bank's capital requirement has little effect on the international transmission of productivity shocks. Second, the contribution of loan default shocks to business cycle fluctuations is negligible under normal economic conditions. Third, an exceptionally large loan loss originating in one country induces a sizeable and simultaneous decline in economic activity in both countries. This is particularly noteworthy, as the 2007?09 global financial crisis was characterized by large credit losses in the US and a simultaneous sharp output reduction in the U.S. and the euro Area. Our results thus suggest that global banks may have played an important role in the international transmission of the crisis.
AUTHORS: Muller, Gernot J.; Kollmann, Robert; Enders, Zeno
DATE: 2011

Working Paper
Wages and human capital in finance: international evidence, 1970-2005
We study the allocation and compensation of human capital in the finance industry in a set of developed economies in 1970-2005. Finance relative skill intensity and skilled wages generally increase but not in all countries, and to varying degrees. Skilled wages in finance account for 36% of increases in overall skill premia, although finance only accounts for 5.4% of skilled private sector employment, on average. Financial deregulation, financial globalization and bank concentration are the most important factors driving wages in finance. Differential investment in information and communication technology does not have causal explanatory power. High finance wages attract skilled international immigration to finance, raising concerns for "brain drain".
AUTHORS: Reshef, Ariell; Boustanifar, Hamid; Grant, Everett
DATE: 2016-02-01

Report
Faster payments: market structure and policy considerations
The U.S. payments industry is in the process of developing ubiquitous, safe, faster electronic solutions for making a broad variety of business and personal payments. How this market for faster payments will evolve will be shaped by a range of economic forces, such as economies of scale and scope, network effects, switching costs, and product differentiation. Emerging technologies could alter these forces and lead to new organizational arrangements or market structures that are different from those in legacy payment markets to date. In light of this uncertainty, this paper examines three hypothetical market structures that may emerge: a dominant operator environment, a multi-operator environment, and a decentralized environment. Each of these market structures has different implications for the public policy objectives of efficiency, safety, and ubiquity. The paper also considers tools to promote positive outcomes in each market structure.
AUTHORS: Baughman, Garth; Manuszak, Mark D.; Stavins, Joanna; Stewart, Kylie; Hayashi, Fumiko; Rosenbaum, Aaron
DATE: 2017-09-21

Report
Uncovering covered interest parity: the role of bank regulation and monetary policy
We analyze the factors underlying the recent deviations from covered interest parity. We show that these deviations can be explained by tighter post-crisis bank capital regulations that made the provision of foreign exchange swaps more costly. Moreover, the recent monetary policy and related interest rate divergence between the United States and other major foreign countries has led to a surge in demand for swapping low interest rate currencies into the U.S. dollar. Given the higher bank balance sheet costs resulting from these regulatory changes, the increased demand for U.S. dollars in the swap market could not be supplied at a constant price, thereby amplifying violations of covered interest parity. Furthermore, we show that dollar swap line agreements existing between the Federal Reserve and foreign central banks mitigate pressure in the swap market. However, the current conditions that govern the provision of dollar funding through foreign central banks are not favorable enough to reduce deviations from covered interest parity to zero.
AUTHORS: Puria, Kovid; Bräuning, Falk
DATE: 2017-06-01

Working Paper
Financial Institutions’ Business Models and the Global Transmission of Monetary Policy
Global financial institutions play an important role in channeling funds across countries and, therefore, transmitting monetary policy from one country to another. In this paper, we study whether such international transmission depends on financial institutions' business models. In particular, we use Dutch, Spanish, and U.S. confidential supervisory data to test whether the transmission operates differently through banks, insurance companies, and pension funds. We find marked heterogeneity in the transmission of monetary policy across the three types of institutions, across the three banking systems, and across banks within each banking system. While insurance companies and pension funds do not transmit home-country monetary policy internationally, banks do, with the direction and strength of the transmission determined by their business models and balance sheet characteristics.
AUTHORS: Duijm, Patty; Frost, Jon; Haan, Jakob de; Haan, Leo de; Argimon, Isabel; Stebunovs, Viktors; Bonner, Clemens; Correa, Ricardo
DATE: 2018-05-29

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