You can bank on it
Bailouts and Financial Fragility
Review of Economic Studies, forthcoming
Should policy makers be prevented from bailing out investors in the event of a crisis? I study this question in a model of financial intermediation with limited commitment. When a crisis occurs, the policy maker will respond with fiscal transfers that partially cover intermediaries' losses. The anticipation of this bailout distorts ex ante incentives, leading intermediaries to become excessively illiquid and increasing financial fragility. Prohibiting bailouts is not necessarily desirable, however: while it induces intermediaries to become more liquid, it may nevertheless lower welfare and leave the economy more susceptible to a crisis. A policy of taxing short-term liabilities, in contrast, can both improve the allocation of resources and promote financial stability.
Deposit Shocks and Credit Supply: Evidence from U.S. Lottery Winners
University of Texas Working Paper, August 2015
This paper estimates the impact of exogenous deposit shocks on credit supply. The empirical strategy exploits a novel quasi-natural experiment: U.S. lottery jackpot winners of Powerball and Mega Millions. I find that the banks that receive the jackpot winner shock experience a large increase in deposits and total lending. The estimate of the elasticity of total small business lending with respect to deposits is 0.934. I control for local credit demand by identifying banks that receive the winners' shocks and by studying their loan origination at the different locations where they operate. Consistent with frictions that originate from adverse selection, the set of small and medium-sized banks and those with the most illiquid balance sheets significantly increase loan origination after the winners' shocks. Finally, the results show that a bank's charter choice matters for credit supply, which suggests that the regulatory mix in the U.S. can have real effects.
Systematically important banks and increased capital requirements in the Dodd-Frank era
Economics Letters, January 2016, Pages 75-77
This paper analyzes the effects of new capital requirements for systematically important financial institutions proposed by the Federal Reserve on September 8, 2014. Results from an event study indicate this announcement led to lower abnormal initial stock returns for systemically important financial firms that then reverse and dissipate after three days. Further, findings suggest that the announcement of the proposed rule change had no impact on key interest series. Overall, the results are consistent with an initial overreaction and subsequent market correction to the announcement of the proposed regulation by equity market investors.
Inflation Targeting Does Not Anchor Inflation Expectations: Evidence from Firms in New Zealand
Saten Kumar et al.
NBER Working Paper, December 2015
We study the (lack of) anchoring of inflation expectations in New Zealand using a new survey of firms. Managers of these firms display little anchoring of inflation expectations, despite twenty-five years of inflation targeting by the Reserve Bank of New Zealand, a fact which we document along a number of dimensions. Managers are unaware of the identities of central bankers as well as central banks' objectives, and are generally poorly informed about recent inflation dynamics. Their forecasts of future inflation reflect high levels of uncertainty and are extremely dispersed as well as volatile at both short and long-run horizons. Similar results can be found in the U.S. using currently available surveys as shown in Binder (2015).
Borrowing High versus Borrowing Higher: Price Dispersion and Shopping Behavior in the U.S. Credit Card Market
Victor Stango & Jonathan Zinman
Review of Financial Studies, forthcoming
We document substantial cross-individual dispersion in U.S. credit card borrowing costs, even after controlling for borrower risk and card characteristics. That remaining dispersion arises because cross-lender pricing heterogeneity generates dispersion in annual percentage rate (APR) offers to borrowers, and borrowers vary in shopping intensity. Our empirics match administrative data to self-reported card shopping intensity and use instruments suggested by fair lending law to account for the endogeneity between APRs and search. The results show that shoppers versus nonshoppers pay APRs as different as those paid by borrowers in the best versus worst credit score deciles. We discuss implications for policy and practice.
Subprime Governance: Agency Costs in Vertically Integrated Banks and the 2008 Mortgage Crisis
Claudine Gartenberg & Lamar Pierce
Strategic Management Journal, forthcoming
This study uses the 2008 mortgage crisis to demonstrate how the relationship between vertical integration and performance crucially depends on corporate governance. Prior research has argued that the vertical integration of mortgage origination and securitization aligned divisional incentives and improved lending quality. We show that vertical integration improved loan performance only in those firms with strong corporate governance and that this performance-integration relationship strongly decreases and actually reverses as governance quality decreases. We interpret these findings as suggesting that the additional control afforded by vertical integration can, in the hands of poorly monitored managers, offset gains from aligned divisional incentives. These findings support the view that corporate governance influences the strategic outcomes of a firm, in our case, by influencing the effectiveness of boundary decisions.
What Fuels the Boom Drives the Bust: Regulation and the Mortgage Crisis
Jihad Dagher & Ning Fu
Economic Journal, forthcoming
The weakly regulated independent mortgage companies (IMCs) had a vastly disproportional contribution to the expansion in risky credit during the mortgage boom and to the ensuing foreclosure crisis. We exploit a quasi-experimental setting, created by the inconsistency of state lender regulations between banks and IMCs and their heterogeneity across states, to isolate the impact of regulation on lending standards using county-pairs straddling state borders. We find that weaker state regulation of IMCs is associated with a sharper expansion of IMCs, particularly in risky high-yield loans, which were also of worse quality in the weakly regulated states, based on subsequent delinquency.
How Do Speed and Security Influence Consumers' Payment Behavior?
Scott Schuh & Joanna Stavins
Contemporary Economic Policy, forthcoming
The Federal Reserve named improvements in the speed and security of the payment system as two of its policy initiatives for 2012-2016. Using new data from the 2013 Survey of Consumer Payment Choice (SCPC) and models from earlier research, we estimate how various aspects of speed and security influence consumers' decisions to adopt and use payment instruments. Some aspects of speed and security have a statistically significant influence on the adoption and use of selected payment instruments, but not as much as other characteristics of payment instruments. Using econometric models to simulate selected policies proposed by the Fed, we show that faster speed of payment deduction for Automatic Clearing House (ACH) transactions would slightly increase consumers' adoption of ACH-based payment methods, while enhanced security of payment cards would marginally increase the use of credit and debit cards. However, neither improvement is likely to increase consumer welfare much because consumer demand for payments is very inelastic with respect to speed and security. Our analysis focuses exclusively on consumers' behavior and does not include potential benefits of improvements to the payment system that would directly benefit businesses or financial institutions. In addition, preventing security breaches may preserve public confidence in the payment system, benefitting consumers even if they do not change their payment behavior.
Uncertainty and Business Cycles: Exogenous Impulse or Endogenous Response?
Sydney Ludvigson, Sai Ma & Serena Ng
NBER Working Paper, December 2015
Uncertainty about the future rises in recessions. But is uncertainty a source of business cycle fluctuations or an endogenous response to them, and does the type of uncertainty matter? Answer: sharply higher uncertainty about real economic activity in recessions is fully an endogenous response to other shocks that cause business cycle fluctuations, while uncertainty about financial markets is a likely source of the fluctuations. Financial market uncertainty has quantitatively large negative consequences for several measures of real activity including employment, production, and orders. Such are the main conclusions drawn from estimation of three-variable structural vector autoregressions. To establish causal effects, we use information contained in external instruments that we construct in a novel way to be valid under credible interpretations of the structural shocks.
Assessing Financial Education: Evidence From Boot Camp
American Economic Journal: Economic Policy, forthcoming
This study estimates the effects of Personal Financial Management Course attendance and enrollment assistance using a natural experiment in the US Army. New enlistees' course attendance reduces the probability of having credit account balances, average balances, delinquencies, and adverse legal actions in the first year after the course, but it has no effects on accounts in the second year or credit scores in either year. The course and its enrollment assistance substantially increase retirement savings rates and average monthly contributions, with effects that persist through at least two years. The course has no significant effects on military labor market outcomes.