Search Results
Report
The use of collateral in bilateral repurchase and securities lending agreements
We use unique data from U.S. bank holding company-affiliated securities dealers to study the use of collateral in bilateral repurchase and securities lending agreements. Market participants? use of collateral differs substantially across asset classes: for U.S. Treasury securities transactions, we find that haircuts are large enough to provide full protection from default, whereas the same is not usually true for equities transactions. Further, although most of the equities in our sample are each associated with a unique haircut, most of the U.S. Treasury securities are each associated with ...
Working Paper
Old, Frail, and Uninsured: Accounting for Puzzles in the U.S. Long-Term Care Insurance Market
Half of U.S. 50-year-olds will experience a nursing home stay before they die, and one in ten will incur out-of-pocket long-term care expenses in excess of $200,000. Surprisingly, only about 10% of individuals over age 62 have private long-term care insurance (LTCI). This paper proposes a quantitative equilibrium optimal contracting model of the LTCI market that features screening along the extensive margin. Frail and/or poor risk groups are ordered a single contract of no insurance that we refer to as a rejection. According to our model, rejections are the main reason that LTCI take-up rates ...
Working Paper
Stress Tests and Information Disclosure
We study an optimal disclosure policy of a regulator that has information about banks (e.g., from conducting stress tests). In our model, disclosure can destroy risk-sharing opportunities for banks (the Hirshleifer effect). Yet, in some cases, some level of disclosure is necessary for risk sharing to occur. We provide conditions under which optimal disclosure takes a simple form (e.g., full disclosure, no disclosure, or a cutoff rule). We also show that, in some cases, optimal disclosure takes a more complicated form (e.g., multiple cutoffs or nonmonotone rules), which we characterize. We ...
Working Paper
Securitization and mortgage default
We find that private-securitized loans perform worse than observably similar, nonsecuritized loans, which provides evidence for adverse selection. The effect of securitization is strongest for prime mortgages, which have not been studied widely in the previous literature and particular prime adjustable-rate mortgages (ARMs): These become delinquent at a 30 percent higher rate when privately securitized. By contrast, our baseline estimates for subprime mortgages show that private-securitized loans default at lower rates. We show, however, that ?early defaulting loans? account for this: those ...
Report
A Dynamic Theory of Collateral Quality and Long-Term Interventions
We study a dynamic model of collateralized lending under adverse selection in which the quality of collateral assets is endogenously determined by hidden effort. Complementarities in incentives lead to non-ergodic dynamics: Asset quality and output grow when asset quality is high, but stagnate or deteriorate otherwise. Inefficiencies remain, even in the most efficient competitive equilibrium?investment and output are vulnerable to spells of lending market illiquidity, and these spells may persist because of suboptimal effort. Nevertheless, benevolent regulators without commitment can destroy ...
Working Paper
Employer Credit Checks: Poverty Traps versus Matching Efficiency
We develop a framework to understand the effects of pre-employment credit screening in both labor and credit markets. People differ in both their propensity to default on debt and the profits they create for firms that employ them. In our calibrated economy, workers with a low default probability are highly productive and therefore generate more profits for their employers; thus, firms create more jobs for those with good credit. However, using credit reports to screen job applicants creates a poverty trap: an unemployed worker with poor credit has a low job-finding rate and cannot improve ...
Speech
Misconduct risk, culture and supervision: remarks at the Culture Roundtable Session with Business Schools and Financial Services Industry, Federal Reserve Bank of New York, New York City
Remarks at the Culture Roundtable Session with Business Schools and Financial Services Industry, Federal Reserve Bank of New York, New York City.
Working Paper
Reforming the US Long-Term Care Insurance Market
Nursing home risk is significant and costly. Yet, most Americans pay for long-term care (LTC) expenses out-of-pocket. This chapter examines reforms to both public and private LTCI provision using a structural model of the US LTCI market. Three policies are considered: universal public LTCI, no public LTCI coverage, and a policy that exempts asset holdings from the public insurance asset test on a dollar-for-dollar basis with private LTCI coverage. We find that this third reform enhances social welfare and creates a vibrant private LTCI market while preserving the safety net provided by public ...
Working Paper
Navigating Higher Education Insurance: An Experimental Study on Demand and Adverse Selection"
We conduct a survey-based experiment with 2,776 students at a non-profit university to analyze income insurance demand in education financing. We offered students a hypothetical choice: either a federal loan with income-driven repayment or an income-share agreement (ISA), with randomized framing of downside protections. Emphasizing income insurance increased ISA uptake by 43%. We observe that students are responsive to changes in contract terms and possible student loan cancellation, which is evidence of preference adjustment or adverse selection. Our results indicate that framing specific ...
Working Paper
Extended Loan Terms and Auto Loan Default Risk
A salient feature of the $1.2 trillion auto-loan market is the extension of loan maturity terms in recentyears. Using a large, national sample of auto loans from the entire auto market, we find that the default rates on six- and seven-year loans are multiple times that of shorter five-year term loans. Most of the default risk difference is due to borrower risks associated with longer-term loans, as those longer-term auto borrowers are more credit and liquidity constrained. We also find borrowers’ loan-term choice to be endogenous and that the endogeneity bias is substantial in conventional ...