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Working Paper
Cross-border banking on the two sides of the Atlantic: does it have an impact on bank crisis management?
In the United States and the European Union (EU), political incentives to oppose cross-border banking have been strong in spite of the measurable benefits to the real economy from breaking down geographic barriers. Even a federal-level supervisor and safety net are not by themselves sufficient to incentivizing cross-border banking although differences in the institutional set-up are reflected in the way the two areas responded to the crisis. The U.S. response was a coordinated response, and the cost of resolving banks was borne at the national level. Moreover, the Federal Deposit Insurance ...
Working Paper
Losing Public Health Insurance: TennCare Disenrollment and Personal Financial Distress
A main goal of health insurance is to smooth out the financial risk that comes with health shocks and health care. Nevertheless, there has been relatively sparse evidence on how health insurance affects financial outcomes. The few studies that exist focus on the effect of gaining health insurance. This paper explores the effect of losing public health insurance on measures of individual financial well-being. In 2005, the state of Tennessee dropped about 170,000 individuals from Medicaid, resulting in a plausibly exogenous shock to health insurance status. Both across- and within-county ...
Working Paper
The credit card debt puzzle: the role of preferences, credit risk, and financial literacy
We use the 1979 National Longitudinal Survey of Youth to revisit what is termed the credit card debt puzzle: why consumers simultaneously co-hold high-interest credit card debt and low-interest assets that could be used to pay down this debt. This dataset contains unique information on intelligence, financial literacy, and preferences, while also providing a complete picture of households? balance sheets. Relative to individuals with no credit card debt but positive liquid assets, individuals in the puzzle group have higher discount rates, slightly lower financial literacy scores, and very ...
Working Paper
Liquidity Windfalls: The Consequences of Repo Rehypothecation
This paper presents a model of repo rehypothecation in which dealers intermediate funds and collateral between cash lenders (e.g., money market funds) and prime brokerage clients (e.g., hedge funds). Dealers take advantage of their position as intermediaries, setting different repo terms with each counterparty. In particular, the difference in haircuts represents a positive cash balance for the dealer that can be an important source of liquidity. The model shows that dealers with higher default risk are more exposed to runs by collateral providers than to runs by cash lenders, who are ...
Working Paper
Earnings Misperceptions and Household Distress
Households learn whether income changes are temporary or persistent from their own paychecks. This paper develops a quantitative model of financial distress that incorporates this inference and estimates the extent to which households overweight recent outcomes—diagnostic expectations—using survey data on income beliefs. The model explains distress without assuming extreme impatience and aligns with the observed relationship between income and interest rates. Learning and diagnostic expectations account for about half of delinquencies and one-third of bankruptcies. Diagnostic expectations ...
Working Paper
Earnings Misperceptions and Household Distress
Households learn whether income changes are temporary or persistent from their own paychecks. This paper develops a quantitative model of financial distress that incorporates this inference and estimates the extent to which households overweight recent outcomes—diagnostic expectations—using survey data on income beliefs. The model explains distress without assuming extreme impatience and aligns with the observed relationship between income and interest rates. Learning and diagnostic expectations account for about half of delinquencies and one-third of bankruptcies. Diagnostic expectations ...
Working Paper
What Drives Household Financial Distress? The Role of Earnings Misperceptions
Why do households borrow heavily and experience financial distress? We develop and estimate a heterogeneous-agent model of unsecured credit and default in which households learn about income persistence and overreact to recent income realizations. We estimate overreaction using survey measures of income expectations and forecast errors, and the remaining parameters to match household debt and financial distress. Information frictions and estimated overreaction account for roughly half of delinquencies and one-third of bankruptcies, and improve the model’s fit of the observed negative ...
Working Paper
Earnings Misperceptions and Household Distress
Households learn whether income changes are temporary or persistent from the history of their own paychecks. This paper develops a quantitative model of household financial distress that incorporates this inference and uses survey data on income expectations to estimate the extent to which households overweight recent outcomes—diagnostic expectations. The model improves on the standard full-information, rational-expectations benchmark in two key dimensions: it explains financial distress without assuming extreme impatience, and it more accurately captures the empirical correlation between ...
Working Paper
Fleeting Forbearance in a World of Persistent Financial Distress
CORRECT ORDER OF AUTHORS: Mustre-del-Río, Sánchez, Athreya. Relative to the persistent delinquency typically observed in consumer credit, mortgage forbearance during the COVID-19 pandemic was surprisingly short-lived. To understand why, we develop a rich structural model and estimate it on credit panel microdata. Next, using the model and survey data, we identify key roles for both selection into mortgages by relatively patient households and the failure of anticipated income losses to materialize. Even taking selection in account, had losses occurred, forbearance participation would have ...
Working Paper
Fleeting Forbearance in a World of Persistent Financial Distress
CORRECT ORDER OF AUTHORS: Mustre-del-Río, Sánchez, Athreya. In the US, households often delay payments on unsecured debt for extended periods. These delinquencies are costly, making them a useful indicator of financial distress. Mortgage forbearance, another form of payment delay, saw swift take-up early in the COVID-19 pandemic, but was fleeting. Most borrowers exited quickly despite generous terms. This paper reconciles these seemingly contradictory payment postponement patterns using a life-cycle model of mortgages and unsecured debt. Combining survey evidence with credit history data, ...