Non-depository Institutions Research Articles

Disproportionate Safety Preference and the Innovation of Fintech Shadow Banking

There has been a dramatic shift in financial intermediation in the last 10 - 15 years from traditional banks to shadow banks (non-depository institutions that rely on originate-to-distribute lending model). We link this rise to an emerging literature that shows that certain and uncertain utility functions are different with a disproportionate preference for certainty. We show that such a preference plays a role in diverting lending away from the traditional banking model to the shadow banking model. Furthermore, a low interest-rate environment emerges as the key contributing factor in the dramatic rise of shadow banking.

Dissecting the segmentation of China's repo markets

China repos trade in the over-the-counter interbank market as well as the stock exchange. This paper examines the behaviors, sources, and drivers of the spread between China's exchange and interbank repo rates from December 2006 to June 2018. After adjusting for different day-count quoting methods, I dissect the exchange to interbank repo spread into two components: cross-market segmentation between exchange and interbank markets for non-depository institutions (NDIs), and within-market counterparty segmentation between NDIs and depository institutions (DIs) in the interbank market. The 1-day repo markets are found to be more segmented, with the spread mainly driven by the cross-market segmentation for NDIs, reflecting the two different market mechanisms and trading frictions that prevent NDIs from effectively arbitraging across the two markets in the shorter tenor. On the other hand, the 7-day repo markets are found to be less segmented, with the spread mainly driven by the counterparty segmentation between NDIs and DIs within the interbank market, reflecting greater counterparty credit and liquidity risks for NDIs relative to DIs. Further analysis uncovers the impacts of quarter-end effect, monetary policies, and shadow banking activities on the cross-market and within-market segmentations in China's repo markets.

“Don't Know What You Got till It’s Gone”: The Community Reinvestment Act in a Changing Financial Landscape

This study provides new evidence on the impact of the Community Reinvestment Act (CRA) on mortgage lending by taking advantage of an exogenous policy shock in 2014, which caused significant changes in neighborhoods’ CRA eligibility in the Philadelphia market. The loss of CRA coverage leads to an over 10% decrease in purchase originations by CRA-regulated lenders. While nondepository institutions replace approximately half, but not all, of the decreased lending, their increased market share is accompanied by a greater involvement in riskier and more costly FHA lending. This study demonstrates how different lenders respond to the incentive of CRA credit.

COVID Response: The Paycheck Protection Program Liquidity Facility

To bolster the effectiveness of the Small Business Administration’s Paycheck Protection Program (PPP), the Federal Reserve, with the backing of the Secretary of the Treasury, established the Paycheck Protection Program Liquidity Facility (PPPLF). The facility was intended to supply liquidity to financial institutions participating in the PPP and thereby provide relief to small businesses and help them maintain payroll. In this article, we lay out the background and rationale for the creation of the facility, cover the salient features of the PPP and the PPPLF, and analyze the facility’s loan take-up. Our findings suggest that the PPPLF played an important role in expanding the supply of credit to smaller banks and nondepository institutions and that these institutions were more likely to originate PPP loans to businesses on the smaller end of the scale.

Differences in subprime loan pricing across races and neighborhoods

We investigate whether race and ethnicity influenced subprime loan pricing during 2005, the peak of the subprime mortgage expansion. We combine loan-level data on the performance of non-prime securitized mortgages with individual- and neighborhood-level data on racial and ethnic characteristics for metropolitan areas in California and Florida. Using a model of rate determination that accounts for predicted loan performance, we evaluate the differences in subprime mortgage rates in terms of racial and ethnic groups and neighborhood characteristics. We find evidence of adverse pricing for Blacks and Hispanics. The evidence of adverse pricing is strongest for purchase mortgages and mortgages originated by non-depository institutions.

Race, Redlining, and Subprime Loan Pricing

We investigate whether race and ethnicity influenced subprime loan pricing during 2005, the peak of the subprime mortgage expansion. We combine loan-level data on the performance of non-prime securitized mortgages with individual- and neighborhood-level data on racial and ethnic characteristics for metropolitan areas in California and Florida. Using a model of rate determination that accounts for predicted loan performance, we evaluate the differences in subprime mortgage rates in terms of racial and ethnic groups and neighborhood characteristics. We find evidence of adverse pricing for blacks and Hispanics. The evidence of adverse pricing is strongest for purchase mortgages and mortgages originated by non-depository institutions.

The Pronounced Impact of Macroeconomic Stress on the Financial Sector: Implications for Real Sector Growth

The financial sector incurred big losses during the recent financial collapse and recession. The losses occurred despite regulatory requirements imposed upon the financial services industry meant to ensure confidence and stability. This study analyzes the profitability and stock returns of financial sector firms during periods of economic and financial market turbulence. It shows that economic downturns and financial stress have a pronounced impact on financial firms. We find that the increased sensitivity to financial market distress appears to increase with recent trends in the financial services industry such as deregulation, globalization, and financial innovation. Moreover, we determine that the source of the increased sensitivity is likely driven by non-depository institutions, such as finance and investment, but not insurance companies. These results raise the question of whether the current regulatory regime can succeed in ensuring that financial markets are sufficiently stable to service an increasingly complex global economy.

Does mandatory disclosure affect subprime lending to minority neighborhoods?

We examine changes in lending behavior in response to the Federal Reserve’s requirement for disclosure of loan pricing information implemented in 2004 for two broad types of lenders, depository and nondepository institutions. We find that although subprime approval rates generally increased after 2004 as the housing market boomed, there was nonetheless a reduction in subprime approval rates to minority neighborhoods following implementation of the pricing disclosure requirement. We also find that the effect of the pricing disclosure requirement on subprime approval rates was stronger for depository institutions than for nondepository institutions. Moreover, depository institutions with good reviews from regulators for effectively serving the financing needs of local communities are less likely to issue higher-priced subprime loans.

The Hong Kong financial system: a new age

This book provides a comprehensive and up-to-date description of the financial system of Hong Kong, a system which has undergone immense changes in recent years. The book, written by scholars and professionals on the finance sector, covers all aspects of the financial system-commercial banking and non-depository institutions, the major financial markets, and information technology.

A Unified Analysis Of Executive Pay: The Case Of The Financial Sector

This study examines executive compensation determinants in the U.S. financial services sector. Multiple theories of executive pay are discussed and tested using a relatively homogenous sample. We perform an in-depth look at the corporate governance and ownership structure of the companies selected. The analysis is conducted for the financial sector as a whole and for each of three sub-groups: commercial banks, brokerage and other non-depository institutions, and insurance companies. Variables that proxy for managerial strategic discretion and task complexity are found to best explain CEO compensation. Corporate governance, including board characteristics and external ownership, is the second leading determinant of pay variation, while firm performance and CEO specific characteristics seem to play the least role. We explore the simultaneous relationship between compensation, firm performance, and board strength and find evidence that the board of directors provides a monitoring function and that a strong board appears to be a substitute with incentive compensation for aligning incentives. These findings, when viewed with subsequent firm performance, support an efficient contracting argument.