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Journal Article
Transmission of Sovereign Risk to Bank Lending
Başkaya, Yusuf Soner; Hardy, Bryan; Kalemli-Özcan, Ṣebnem; Yue, Vivian Z. (2023-02-27)
Banks hold a significant exposure to their own sovereigns. An increase in sovereign risk may hurt banks' balance sheets, causing a decrease in lending and a decline in economic activity. We quantify the transmission of sovereign risk to bank lending and provide new evidence about the effect of sovereign risk on economic outcomes. We consider the 1999 Marmara earthquake in Turkey as an exogenous shock leading to an increase in Turkey's default risk. Our empirical estimates show that, for banks holding a higher amount of government securities, the exogenous change in sovereign default risk ...
Policy Hub , Volume 2023 , Issue 2

Working Paper
Sovereign Risk and Bank Lending: Theory and Evidence from a Natural Disaster
Kalemli-Özcan, Ṣebnem; Başkaya, Yusuf Soner; Hardy, Bryan; Yue, Vivian Z. (2023-02-09)
We quantify the sovereign-bank doom loop by using the 1999 Marmara earthquake as an exogenousshock leading to an increase in Turkey’s default risk. Our theoretical model illustrates that for banks withhigher exposure to government securities, a higher sovereign default risk implies lower net worth andtightening financial constraint. Our empirical estimates confirm the model’s predictions, showing that theexogenous change in sovereign default risk tightens banks’ financial constraints significantly for banks thathold a higher amount of government securities. The resulting tighter bank ...
FRB Atlanta Working Paper , Paper 2023-01

Working Paper
The Impact of Regulatory Stress Tests on Bank Lending and Its Macroeconomic Consequences
Bräuning, Falk; Fillat, Jose (2020-10-01)
We use an expansive regulatory loan-level data set to analyze how the portfolios of the largest US banks have changed in response to the Dodd-Frank Act Stress Test (DFAST) requirements. We find that the portfolios of the largest banks, which are subject to stress-testing, have become more similar to each other since DFAST was implemented in 2011. We also find that banks with poor stress-test results tend to adjust their portfolios in a way that makes them more similar to the portfolios of banks that performed well in the stress-testing. In general, stress-testing has resulted in more ...
Working Papers , Paper 20-12

Report
Financial frictions, real estate collateral, and small firm activity in Europe
Blickle, Kristian S.; Banerjee, Ryan N. (2018-10-01)
We observe significant heterogeneity in the correlation between changes in house prices and the growth of small firms across certain countries in Europe. We find that, overall, the correlation is far greater in Southern Europe than in Northern Europe. Using a simple model, we show that this heterogeneity may relate to financial frictions in a country. We confirm the model?s propositions in a number of empirical analyses for the following countries in Northern and Southern Europe: the United Kingdom, Norway, France, Italy, Spain, and Portugal. Small firms in countries with higher financial ...
Staff Reports , Paper 868

Working Paper
Dynamic Pricing of Credit Cards and the Effects of Regulation
Serfes, Konstantinos; Hunt, Robert M.; Hong, Suting (2018-11-07)
We construct a two-period model of revolving credit with asymmetric information and adverse selection.In the second period, lenders exploit an informational advantage with respect to their own customers. Those rents stimulate competition for customers in the first period. The informational advantage the current lender enjoys relative to its competitors determines interest rates, credit supply, and switching behavior. We evaluate the consequences of limiting the repricing of existing balances as implemented by recent legislation. Such restrictions increase deadweight losses and reduce ex ante ...
Working Papers , Paper 18-23

Report
Bank Funding Risk, Reference Rates, and Credit Supply
Luck, Stephan; Harry, Cooperman; Wang, Zachry; Yang, Yilin; Duffie, Darrell (2022-12-01)
Corporate credit lines are drawn more heavily when funding markets are more stressed. This covariance elevates expected bank funding costs. We show that credit supply is dampened by the associated debt-overhang cost to bank shareholders. Until 2022, this impact was reduced by linking the interest paid on lines to credit-sensitive reference rates such as LIBOR. We show that transition to risk-free reference rates may exacerbate this friction. The adverse impact on credit supply is offset if drawdowns are expected to be left on deposit at the same bank, which happened at some of the largest ...
Staff Reports , Paper 1042

Working Paper
Credit Supply, Prices, and Non-price Mechanisms in the Mortgage Market
Mondragon, John (2024-08-12)
I use an episode of relatively tight credit supply in the jumbo mortgage market to quantify the importance of price and non-price credit supply mechanisms in explaining changes in borrowing. Following market disruptions in March 2020, borrowers with jumbo loans saw significantly tighter credit supply conditions relative to borrowers with conforming loans. As a result, jumbo borrowers were 50 percent less likely to refinance and when they refinanced they borrowed 4-6 percent less than counterfactual borrowers facing looser credit conditions. The reduction in borrowing may have been caused by ...
Working Paper Series , Paper 2024

Working Paper
The ins and outs of mortgage debt during the housing boom and bust
Bhutta, Neil (2014-07-23)
From 1999 to 2013, U.S. mortgage debt doubled and then contracted sharply. Our understanding of the factors driving this volatility in the stock of debt is hampered by a lack of data on mortgage flows. Using comprehensive, individual-level panel data on consumer liabilities, I estimate detailed mortgage inflows and outflows. During the boom, inflows from real estate investors tripled, far outpacing growth from other segments such as first-time homebuyers. During the bust, although defaults and deleveraging are popular explanations for the debt decline, a collapse in inflows has been the major ...
Finance and Economics Discussion Series , Paper 2014-91

Report
Does CFPB Oversight Crimp Credit?
Vickery, James; Plosser, Matthew; Fuster, Andreas (2018-06-01)
We study how regulatory oversight by the Consumer Financial Protection Bureau (CFPB) affects mortgage credit supply and other aspects of bank behavior. We use a difference-in-differences approach exploiting changes in regulatory intensity and a size cutoff, below which banks are exempt from CFPB scrutiny. CFPB oversight leads to a reduction in lending in the Federal Housing Administration (FHA) market, which primarily serves riskier borrowers. However, it is also associated with a lower transition probability from moderate to serious delinquency, suggesting that tighter regulatory oversight ...
Staff Reports , Paper 857

Working Paper
Stress Tests and Small Business Lending
Cortes, Kristle Romero; Demyanyk, Yuliya; Li, Lei; Loutskina, Elena; Strahan, Philip E. (2018-03-01)
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 ...
Working Papers (Old Series) , Paper 1802

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