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Working Paper
Equilibrium with Mutual Organizations in Adverse Selection Economies
Boyd, John H.; Blandin, Adam; Prescott, Edward C. (2015-01-09)
An equilibrium concept in the Debreu (1954) theory-of-value tradition is developed for a class of adverse selection economies and applied to the Spence signaling and Rothschild-Stiglitz (1976) adverse selection environments. The equilibrium exists and is optimal. Further, all equilibria have the same individual type utility vector. The economies are large with a finite number of types that maximize expected utility on an underlying commodity space. An implication of the analysis is that the invisible hand works for this class of adverse selection economies.
Working Papers , Paper 717

Working Paper
Self-fulfilling Runs: Evidence from the U.S. Life Insurance Industry
Verani, Stéphane; Narajabad, Borghan N.; Foley-Fisher, Nathan (2015-03-25)
Is liquidity creation in shadow banking vulnerable to self-fulfilling runs? Investors typically decide to withdraw simultaneously, making it challenging to identify self-fulfilling runs. In this paper, we exploit the contractual structure of funding agreement-backed securities offered by U.S. life insurers to institutional investors. The contracts allow us to obtain variation in investors' expectations about other investors' actions that is plausibly orthogonal to changes in fundamentals. We find that a run on U.S. life insurers during the summer of 2007 was partly due to self-fulfilling ...
Finance and Economics Discussion Series , Paper 2015-32

Report
Insurance Companies and the Growth of Corporate Loans' Securitization
Santos, João A. C.; Fringuellotti, Fulvia (2021-08-01)
Insurance companies nonupled their CLO investments in the post-crisis period. This growth has far outpaced that of loans and bonds and is characterized by a strong preference for mezzanine tranches over triple-A tranches. Conditional on capital charges, insurance companies invest more in bonds and CLO tranches with higher yields. Importantly, they prefer CLO tranches because these carry higher yields relative to bonds. Preferences increased following the 2010 capital regulatory reform, resulting in insurance companies holding 40 percent of outstanding mezzanine tranches. Insurance companies ...
Staff Reports , Paper 975

Newsletter
How FAIR Plans Confronted Redlining in America
Nwokolo, Ramzee (2023-09)
Access to financial services, including insurance, is vital for the growth and development of communities. Without banks issuing residential mortgages and business loans, it is extremely difficult for people to purchase homes and grow their businesses. Without property insurance, banks will be reluctant to provide such loans. Thus, the inability to access property insurance makes communities more vulnerable to cycles of disinvestment and decline. In this Chicago Fed Letter, I examine the Fair Access to Insurance Requirements (FAIR) plans, how they addressed the issues of insurance ...
Chicago Fed Letter , Volume No 484 , Pages 8

Working Paper
Household Financial Decision-Making After Natural Disasters: Evidence from Hurricane Harvey
del Valle, Alejandro; Scharlemann, Tess C.; Shore, Stephen H. (2022-03-25)
Hurricane Harvey brought more than four feet of rainfall to the Houston area in August 2017, leading to substantial flooding in many areas. Using regulatory data with detailed information on borrowing terms, we compare the borrowing response to Hurricane Harvey in parts of Houston that were more and less affected by flooding. We find that hurricane-affected households borrowed in a price-sensitive and time-limited manner, relying almost exclusively on promotional-rate credit cards and mortgage forbearance for new credit and repaying balances quickly. We find that conditional on flooding, ...
Finance and Economics Discussion Series , Paper 2022-015

Working Paper
Measuring Interest Rate Risk in the Life Insurance Sector: The U.S. and the U.K.
Rosen, Richard J.; Hartley, Daniel; Paulson, Anna L. (2016-01-03)
We use a two factor model of life insurer stock returns to measure interest rate risk at U.S. and U.K. insurers. Our estimates show that interest rate risk among U.S. life insurers increased as interest rates decreased to historically low levels in recent years. For life insurers in the U.K., in contrast, interest rate risk remained low during this time, roughly unchanged from what it was in the period prior to the financial crisis when long-term interest rates were in their usual historical ranges. We attribute these differences to the heavier use of products that combine guarantees with ...
Working Paper Series , Paper WP-2016-2

Working Paper
Consumers and Guaranteed Asset Protection (GAP Protection) on Vehicle Financing Contracts: A First Look
Durkin, Thomas A.; Elliehausen, Gregory E.; Miller, Jr., Thomas W. (2022-09-30)
Guaranteed Asset Protection (GAP) shields purchasers from financial risks of losses exceeding insured collateral values if vehicles become total losses. Yet surprisingly little is known about the sales of this product, or consumers' attitudes toward it. In this study, we report the results of a representative national survey conducted by the Survey Research Center (SRC) of the University of Michigan. The SRC interviewed 1,206 individuals in the fall of 2020. This survey shows that consumers purchased GAP in about 39 percent of nanced vehicle transactions. Consumers purchase GAP more often ...
Finance and Economics Discussion Series , Paper 2022-062

Working Paper
Affordability, Financial Innovation, and the Start of the Housing Boom
Dokko, Jane K.; Keys, Benjamin J.; Relihan, Lindsay E. (2019-01-31)
At their peak in 2005, roughly 60 percent of all purchase mortgage loans originated in the United States contained at least one non-traditional feature. These features, which allowed borrowers easier access to credit through teaser interest rates, interest-only or negative amortization periods, and extended payment terms, have been the subject of much regulatory and popular criticism. In this paper, we construct a novel county-level dataset to analyze the relationship between rising house prices and non-traditional features of mortgage contracts. We apply a break-point methodology and find ...
Working Paper Series , Paper WP-2019-1

Journal Article
Introduction to Special Issue: The Appropriate Role of Government in U.S. Mortgage Markets
Tracy, Joseph; Frame, W. Scott (2018-24-03)
The U.S. mortgage finance system was one of the focal points of the 2007-08 financial crisis, yet legislative decisions about the appropriate role of the federal government in the system remain unsettled. Policy deliberations have focused on Fannie Mae and Freddie Mac?the two enormous government-sponsored enterprises that were placed into federal conservatorship in September 2008. The two GSEs have long been the centerpieces of a mortgage finance system that relies on capital market financing of U.S. residential mortgages. This volume contains eight articles that touch on several key ...
Economic Policy Review , Issue 24-3 , Pages 1-10

Working Paper
Investment Commonality across Insurance Companies : Fire Sale Risk and Corporate Yield Spreads
Nanda, Vikram; Wu, Wei; Zhou, Xing (2017-06-28)
Insurance companies often follow highly correlated investment strategies. As major investors in corporate bonds, their investment commonalities subject investors to fire-sale risk when regulatory restrictions prompt widespread divestment of a bond following a rating downgrade. Reflective of fire-sale risk, clustering of insurance companies in a bond has significant explanatory power for yield spreads, controlling for liquidity, credit risk and other factors. The effect of fire-sale risk on bond yield spreads is more evident for bonds held to a greater extent by capital-constrained insurance ...
Finance and Economics Discussion Series , Paper 2017-069

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