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Working Paper
Imperfect Information Transmission from Banks to Investors: Macroeconomic Implications
We study the interaction of information production in loan-backed asset markets and credit allocation in a general equilibrium framework. Originating banks can screen their borrowers, but can inform investors of their asset type only through an error-prone rating technology. The premium paid on highly rated assets emerges as the main determinant of screening effort. Because the rating technology is imperfect, this premium is insufficient to induce the efficient level of screening. However, the fact that banks know their asset quality and produce ratings accordingly helps keep the premium ...
Journal Article
Imperfect Information Transmission from Banks to Investors: Macroeconomic Implications
Our goal is to elucidate the interaction of banks' screening effort and strategic information production in loan-backed asset markets using a general equilibrium framework. Asset quality is unobserved by investors, but banks may purchase error-prone ratings. The premium paid on highly rated assets emerges as the main determinant of banks' screening effort. The fact that rating strategies reflect banks' private information about asset quality helps keep this premium high. Conventional regulatory policies interfere with this decision margin, thereby reducing signaling value of high ratings and ...
Report
Extend-and-Pretend in the U.S. CRE Market
We show that in the post-pandemic period, weakly capitalized banks provided maturity extensions and granted payment relief to distressed commercial real estate (CRE) borrowers to preserve capital, leading to credit misallocation and a buildup of financial fragility. Using supervisory data, we detect this “extend-and- pretend” behavior in CRE mortgage lending and in bank lending to REITs exposed to distressed CRE. These maturity extensions increased the stock of CRE mortgages maturing in the near term, raising the risk of large losses materializing over a short period. Extend-and-pretend ...
Working Paper
Imperfect Information Transmission from Banks to Investors: Macroeconomic Implications
Our goal is to elucidate the interaction of banks' screening effort and strategic information production in loan-backed asset markets using a general equilibrium framework. Asset quality is unobserved by investors, but banks may purchase error-prone ratings. The premium paid on highly rated assets emerges as the main determinant of banks' screening effort. The fact that rating strategies reflect banks' private information about asset quality helps keep this premium high. Conventional regulatory policies interfere with this decision margin, thereby reducing signaling value of high ratings and ...