Large Lenders Research Articles

Killing two birds with one stone? Sound investment with social impact

AbstractThis paper uses a novel dataset on investments by the European Bank for Reconstruction and Development to quantify a (sizeable) trade‐off between the impact and financial objectives of a large lender. The unique feature of this dataset is ex ante records of impact. These are made at the early stages of work on each transaction alongside probability‐of‐default scores. Impact scores are further updated at the final approval stage with around 55 percent of transaction concepts translating into signed deals. We show that this approach delivers a simultaneous selection of debt investments on the quality of credit and impact with a sizable trade‐off between pursuing commercial and development objectives. For commercially riskier investments, impact characteristics have a greater bearing on the probability of an investment going ahead. We further use machine‐learning analysis to show that the impact of some investments is strengthened prior to project approval.

Banks' Strategic Responses to Supervisory Coverage: Evidence from a Natural Experiment

AbstractU.S. bank supervisors conduct frequent and comprehensive loan‐level exams of the syndicated loan market. These exams are costly as adverse exam loan ratings may increase supervisory scrutiny and reduce bank capital. Relying on an unexpected change in supervisory coverage in 1998, we estimate that the cost of bank credit for borrowers excluded from supervision decreases by approximately 18%. We show that large lenders use the coverage change to exclude deals from supervision, especially riskier deals. Strikingly, small lenders shift their lending to increase supervisory coverage, suggesting the potential importance of supervision in reducing information asymmetries within lending syndicates.

Small Bank Lending in the Era of Fintech and Shadow Banks: A Sideshow?

Abstract Amid the emerging dominance of nonbanks, small banks use key financing advantages to persist in the mortgage market. We provide evidence of the heterogeneous impact of two shocks to the supply of mortgage credit: postcrisis regulatory burden and GSE financing cost changes. Small banks exploit regulation disproportionately affecting the largest four banks (Big4) and their ability to lend on balance sheet to strongly substitute for the retreating Big4. The erasure of guarantee fee (g-fee) discounts for large lenders facilitates small bank growth in GSE lending. Small banks also grow balance sheet loans in areas more exposed to g-fee hikes.

Risks to global biodiversity and Indigenous lands from China's overseas development finance.

China has become one of the world's largest lenders in overseas development finance. Development projects, such as roads, railways and power plants, often drive biodiversity loss and infringe on Indigenous lands, yet the risks implicit in China's overseas development finance are poorly understood. Here we examine the extent to which projects financed by China's policy banks between 2008 and 2019 occur within and adjacent to areas where large-scale investment can present considerable risks to biodiversity and Indigenous peoples. Further, we compare these risks with those posed by similar projects financed by the World Bank, previously the world's largest source of development finance. We found that 63% of China-financed projects overlap with critical habitats, protected areas or Indigenous lands, with up to 24% of the world's threatened birds, mammals, reptiles and amphibians potentially impacted by the projects. Hotspots of the risks are primarily distributed in northern sub-Saharan Africa, Southeast Asia and parts of South America. Overall, China's development projects pose greater risks than those of the World Bank, particularly within the energy sector. These results provide an important global outlook of socio-ecological risks that can guide strategies for greening China's development finance around the world.

Leverage Regulation and Market Structure: A Structural Model of the U.K. Mortgage Market

ABSTRACTI develop a structural model of mortgage demand and lender competition to study how leverage regulation affects the U.K. mortgage market. Using variation in risk‐weighted capital requirements across lenders and mortgages with different loan‐to‐values (LTVs), I show that a 1‐percentage‐point increase in risk‐weighted capital requirements increases lenders' marginal cost of originating mortgages by about 26 basis points (11%) on average. I use the estimated model to study proposed leverage regulations. Counterfactual analyses show that large lenders exploit a regulatory cost advantage, which increases concentration by about 20%, and suggest that banning high‐LTV mortgages may reduce large lenders' equity buffer.

Too Much Skin-in-the-Game? The Effect of Mortgage Market Concentration on Credit and House Prices

Abstract In 2007, as American housing markets started to decline, the government-sponsored enterprises dramatically increased their acquisitions of low FICO and high loan-to-value mortgages. By 2008, the agencies had reversed course by decreasing their high-risk acquisitions. I develop a theory in which large lenders temporarily increase high-risk activity at the end of a boom. In the model, lenders with many outstanding mortgages have incentives to extend risky credit to prop up house prices. The increase in house prices lessens the losses they make on their outstanding portfolio of mortgages. As the bust continues, lenders slowly wind down their mortgage exposure.

Big Bank Theory: A Study of Amalgamation Plan of 10 Public Sector Banks into 4 Entities

The Indian government on 30th August 2019 unveiled a plan to merge 10 public sector banks (PSBs) into four, reducing the number of state-owned banks from 18 to 12, in a bid to create “next-generation” financial institutions with stronger balance sheets and bigger risk appetite. Having done two rounds of bank consolidation earlier, this is what Government wants to do for a robust banking system and a $5-trillion economy. Punjab National Bank will take over Oriental Bank of Commerce & United Bank of India to become the country’s largest lender after State Bank of India in terms of business. Canara Bank will subsume Syndicate Bank; Andhra Bank and Corporation Bank will merge with Union Bank of India; and Allahabad Bank will become part of Indian Bank. The key factors for the mergers were: Technological platform, customer reach, cultural similarities, and competitiveness. In 2017, India had 27 PSBs, but the National Democratic Alliance government implemented two rounds of mergers in its previous tenure. One was the merger of five associate banks and Bharatiya Mahila Bank with SBI (from April 2017); second, Dena Bank and Vijaya Bank merged with Bank of Baroda to create the country’s third-biggest lender, which came into effect from April 1 this year. The present paper is based on the study of Public Sector banks total business, deposits and Non-Performing Assets (NPA). The paper also studies the Government’s plan to amalgamate the 10 public sector banks into four large institutions as a part of its attempt to bolster the capital base of these lenders. The paper in the end, studies the impact of PSBs Merger and how customers are likely to be impacted.

Cross-ideological coordination by private interests: Evidence from mortgage market regulation under Dodd-Frank

AbstractRulemaking pursuant to the 2010 Dodd-Frank Act provides a useful setting to assess theories of interest group influence. In the wake of the financial crisis, Congress delegated new rulemaking authority to federal agencies to regulate mortgage markets. A critical aspect of this new regulatory regime engendered significant controversy from affected interests: “credit risk retention” would require sponsors of asset-backed securities to retain a stake in the risk of securitized assets. Contrary to unrefined industry capture-based accounts stressing the disproportionate role of larger, well-established regulated entities in setting policy, we find little evidence of sustained effort by large lenders to dilute regulatory standards via political investments. Rather, a diverse coalition of housing sector, community, and civil rights groups, backed by an ideologically diverse swath of legislators, forced substantial regulatory retrenchment. Our analysis suggests a more nuanced view of private influence, in which coordination plays a more substantial role than political investments alone.

Can regulation de-bias appraisers?

This paper examines the effect of a regulatory action (the Home Valuation Code of Conduct) that was designed to reduce the incidence of inflated collateral valuations. We identify the impact of the regulation using a difference-in-difference identification strategy. Our baseline results confirm that the regulation reduced inflated valuations in refinance transactions by 16% in the large lender sample, compared to small lenders and a placebo sample. The effect is most significant in low-liquidity and low-distress markets, but not in other markets. We find that the regulation had a significant impact on loan to value ratio and interest rate, and it also led to a significant increase in defaults but a decrease in prepayments.

Rebalancing a lopsided global economy

AbstractThe growth in global current account imbalances has produced a lopsided global economy, characterised by large lenders and large borrowers, large savers and large consumers, and large exporters and large importers. For many years, the G20 has committed to reducing these imbalances. But has it been successful? Are the G20's policy prescriptions for reducing these imbalances the right ones? And have countries altered their policies because of the discussions and commitments in the G20 or not? The paper assesses whether the G20 has achieved its goal of reducing global current account imbalances. It then uses the G‐Cubed (G20) model — a multi‐country, multi‐sector, intertemporal general equilibrium model — to assess the impacts of the G20's proposed policy agenda. It shows that the G20's policy prescriptions — reducing the fiscal deficit in the United States, increasing public infrastructure investment in Germany and increasing domestic consumption in China — are not necessarily effective in reducing current account imbalances and, when imbalances are reduced, it often comes at the cost of the real economy. Finally, the paper uses the results from in‐depth interviews with 61 policymakers from across all G20 countries — including Janet Yellen, Kevin Rudd, Ben Bernanke, Haruhiko Kuroda, Jack Lew, Mark Carney and 55 others — to explore whether the G20's focus on current account imbalances influences domestic policies. It finds that, while the G20's influence has been marginal, there are ways in which it could be strengthened. The paper concludes with a discussion on how the G20's agenda could be reformed to help reduce current account imbalances in the future.

Small Bank Lending Amidst the Ascent of Fintech and Shadow Banking: A Sideshow?

Amid the emerging dominance of nonbanks, small banks use key financing advantages to persist in the mortgage market. We provide evidence on the heterogeneous impact of two shocks to the supply of mortgage credit: post-crisis regulatory burden and GSE financing cost changes. Small banks exploit disproportionate regulation on the largest four banks (Big4) and their ability to lend on balance sheet to strongly substitute for the retreating Big4. The erasure of guarantee fee (g-fee) discounts for large lenders facilitates small bank growth in GSE lending. Small banks also grow balance sheet loans in areas more exposed to g-fee hikes.

Sovereign lending after debt relief

ABSTRACTDebt relief has been controversial due to its potential to reward irresponsible behavior by debtor governments. Recently, however, observers note that debt relief might also induce irresponsible behavior by creditor governments. A collective action problem might exist, where creditor governments target new loans to developing countries that just received debt relief from a different creditor. I investigate if debt relief affects decisions by creditor governments to provide new loans. Additionally, I analyze which types of creditor governments are more likely to lend to recipients of debt relief. I find that China and other emerging creditors are not more likely to lend to recipients of debt relief than western creditor governments. Instead, creditor governments of smaller economies are more likely than those of larger economies to free-ride on debt relief provided by other lenders. If states lend to gain influence, larger lenders will typically crowd out smaller creditors. However, if a debtor state just received debt relief and is therefore viewed as a greater risk, small creditors may see an opportunity to gain influence by providing a loan that no other state wants to provide.

Leverage Regulation and Market Structure: An Empirical Model of the UK Mortgage Market

I develop a structural model of mortgage demand and lender competition to study how leverage regulation a ffects the equilibrium in the UK mortgage market. Using variation in risk-weighted capital requirements jointly across lenders and mortgages with di fferential loan-to-values, I show that a one-percentage-point increase in risk-weighted capital requirements increases lenders' marginal cost of originating mortgages by about 26 basis points (11 percent) for the average mortgage product. I use the estimated model to study proposed leverage regulations. Counterfactual analyses show that large lenders exploit a regulatory cost advantage, which increases concentration of mortgage originations by about 20 percent, and suggest that banning high loan-to-value mortgages may reduce large lenders' equity bu er.

Too Much Skin-in-the-Game?: The Effect of Mortgage Market Concentration on Credit and House Prices

In 2007, as American housing markets started to decline, the government-sponsored enterprises dramatically increased their acquisitions of low FICO and high loan-to-value mortgages. By 2008, the agencies had reversed course by decreasing their high-risk acquisitions. I develop a theory in which large lenders temporarily increase high-risk activity at the end of a boom. In the model, lenders with many outstanding mortgages have incentives to extend risky credit to prop up house prices. The increase in house prices lessens the losses they make on their outstanding portfolio of mortgages. As the bust continues, lenders slowly wind down their mortgage exposure.

Improved Statistical Methods for the Calculation of Damages in Discrimination Lawsuits

This paper develops a new method to calculate individual-specific damage payments in discrimination lawsuits using empirical Bayes techniques and a simple random coefficients model. The method yields payments that can be mathematically proven to be more accurate than existing statistically-based approaches, as measured by the mean squared error. This method also provides a natural justification for zero payments to members of the non-injured class and substantially reduces the bias caused by the legal restriction on negative payments. We empirically demonstrate our method in the context of mortgage pricing decisions using detailed loan-level data from a large subprime lender.

The Creditor Channel of Liquidity Crises

This paper presents a model to study the transmission of liquidity shocks across financial institutions through the creditor channel. In the model, a borrower institution obtains funds from a large institutional lender and small investors. When the large lender's asset market is hit by a liquidity shock, it might decide to withdraw funding extended to the borrower. The potential withdrawal by the large lender causes small investors to panic and to close positions even if the large lender does not. Facing funding problems, the borrower has to cut its activities, contributing to further shocks to the supply of market liquidity. The original shock is exacerbated, which reinforces withdrawals by all creditors. The model helps explain how the spreading of liquidity shocks from the broker–dealer sector to the hedge fund sector and the feedback contribute to a systemic crisis.

Does Competition Reduce Racial Discrimination in Lending?

This paper examines whether increases in bank competition reduce discriminatory practices in mortgage lending. Lenders are significantly less likely to approve black applicants' loan applications despite facing similar credit risk. However, following the relaxation of interstate bank branching laws in the 1990s, increases in local lending competition reduced the approval differential between potential white and black borrowers by roughly one quarter. The reduction was driven both by incumbent lenders altering lending policies to avoid losing market share and by the entry of new banks. The results suggest strong complementaries between direct regulation and the competition mechanism. In particular, direct regulation is effective against large lenders where statistical proof problems are less severe, while competition provides incentives to smaller, harder to regulate lenders.

Ditching the Middle Class with Financial Regulation

We analyze the effects of a recent piece of consumer protection regulation -- Dodd-Frank -- on mortgage originations. Dodd-Frank aimed at reducing mortgage fees and abuses against vulnerable borrowers, but increased the costs of originating mortgages. We find it triggered a substantial redistribution of credit from middle-class households to wealthy households. Lenders reduced credit to middle-class households by 15%, and increased it to wealthy households by 21%, after controlling for drivers of the demand for housing, local house prices, and foreclosures. Large lenders found it less costly to react to Dodd-Frank. We thus instrument households' exposure to Dodd-Frank with the pre-crisis share of mortgages originated by large lenders in each county. The redistribution of credit from the middle-class to the wealthy was higher in counties more exposed to large lenders, which are similar to other counties. Results hold at the individual-loan level and zip-code level, at the intensive margin (amount lent) and extensive margin (number of loans originated), and for accepted and rejected loans. Changes in the distribution of refinancing loans do not explain the results.

Ditching the Middle Class with Consumer Protection Regulation

We analyze the effects of a recent piece of consumer-protection regulation – Dodd-Frank – on mortgage originations. Dodd-Frank aimed at reducing mortgage fees and abuses against vulnerable borrowers, but increased the costs of originating mortgages. We find it triggered a substantial redistribution of credit from middle-class households to wealthy households. Lenders reduced credit to middle-class households by 15%, and increased credit to wealthy households by 21%, after controlling for drivers of the demand for housing, local house prices, and foreclosures. Large lenders found reacting to Dodd-Frank to be less costly. We thus instrument households’ exposure to Dodd-Frank with the pre-crisis share of mortgages originated by large lenders in each county. The redistribution of credit from the middle class to the wealthy was higher in counties more exposed to large lenders, which are similar to other counties. Results hold at the individual-loan level and zip-code level, at the intensive margin (amount lent) and extensive margin (number of loans originated), and for accepted and rejected loans. Changes in the distribution of refinancing loans do not explain the results.

Regressive Mortgage Credit Redistribution in the Post-crisis Era

We analyze the effects of a recent piece of consumer protection regulation -- Dodd-Frank -- on mortgage originations. Dodd-Frank aimed at reducing mortgage fees and abuses against vulnerable borrowers, but increased the costs of originating mortgages. We find it triggered a substantial redistribution of credit from middle-class households to wealthy households. Lenders reduced credit to middle-class households by 15%, and increased it to wealthy households by 21%, after controlling for drivers of the demand for housing, local house prices, and foreclosures. Large lenders found it less costly to react to Dodd-Frank. We thus instrument households' exposure to Dodd-Frank with the pre-crisis share of mortgages originated by large lenders in each county. The redistribution of credit from the middle-class to the wealthy was higher in counties more exposed to large lenders, which are similar to other counties. Results hold at the individual-loan level and zip-code level, at the intensive margin (amount lent) and extensive margin (number of loans originated), and for accepted and rejected loans. Changes in the distribution of refinancing loans do not explain the results.