New Economics Papers
on Banking
Issue of 2009‒04‒18
four papers chosen by
Roberto J. Santillán–Salgado, EGADE-ITESM

  1. “Managing Banks’ Optimal Debt Contracts under Costly Enforcement” By Celli, Gian Luca
  2. The Alchemy of CDO Credit Ratings By Efraim Benmelech; Jennifer Dlugosz
  3. How the Subprime Crisis Went Global: Evidence from Bank Credit Default Swap Spreads By Barry Eichengreen; Ashoka Mody; Milan Nedeljkovic; Lucio Sarno
  4. Subprime mortgage pricing: the impact of race, ethnicity, and gender on the cost of borrowing By Andrew Haughwout; Christopher Mayer; Joseph Tracy

  1. By: Celli, Gian Luca
    Abstract: The proposed research model from “Optimal Debt Contracts under Costly Enforcement” alters the original Costly State Verification (CSV) model introduced by Townsend (1979) by assuming that monitoring is non-contractible and non-deterministic. It emerges, from my analysis, that there are technical problems with the entrepreneur participation constraint. Particularly, the authors did not frame the principal optimization problem taking in to account a type-dependent participation constraint. To correct for this errors, I developed an adverse selection model that integrates the agent out-side opportunity utility. This approach opens up in to an interesting research turf on hypothetical creditors and debt market segmentation.
    Keywords: Debt Tiers, Agency Costs, Debt Management, Debt Contract, Costly Enforcement, Adverse Selection Models, Investor Heterogeneity
    JEL: D86
    Date: 2008–05–28
  2. By: Efraim Benmelech; Jennifer Dlugosz
    Abstract: Collateralized Loan Obligations (CLOs) were one of the largest and fastest growing segments of the structured finance market, fueling the 2003-2007 boom in syndicated loans and leveraged buyouts. The credit crisis brought CLO issuance to a halt, and as a result the leveraged loan market dried up. Similar to other structured finance products, investors in CLOs rely heavily on credit rating provided by the rating agencies, yet little is known about CLO rating practices. This paper attempts to fill that gap. Using novel hand-collected data on 3,912 tranches of Collateralized Loan Obligations (CLO) we document the rating practices of CLOs and analyze their existing structures.
    JEL: G24 G28
    Date: 2009–04
  3. By: Barry Eichengreen; Ashoka Mody; Milan Nedeljkovic; Lucio Sarno
    Abstract: How did the Subprime Crisis, a problem in a small corner of U.S. financial markets, affect the entire global banking system? To shed light on this question we use principal components analysis to identify common factors in the movement of banks' credit default swap spreads. We find that fortunes of international banks rise and fall together even in normal times along with short-term global economic prospects. But the importance of common factors rose steadily to exceptional levels from the outbreak of the Subprime Crisis to past the rescue of Bear Stearns, reflecting a diffuse sense that funding and credit risk was increasing. Following the failure of Lehman Brothers, the interdependencies briefly increased to a new high, before they fell back to the pre-Lehman elevated levels – but now they more clearly reflected heightened funding and counterparty risk. After Lehman's failure, the prospect of global recession became imminent, auguring the further deterioration of banks' loan portfolios. At this point the entire global financial system had become infected.
    JEL: F36 G15 G18
    Date: 2009–04
  4. By: Andrew Haughwout; Christopher Mayer; Joseph Tracy
    Abstract: Some observers have argued that minority borrowers and neighborhoods were targeted for expensive credit in 2004-06, the peak period for subprime lending. To investigate this claim, we take advantage of a new data set that merges demographic information on subprime borrowers with information on the mortgages they took out. In a sample of more than 75,000 adjustable-rate mortgages, we find no evidence of adverse pricing by race, ethnicity, or gender in either the initial rate or the reset margin. Indeed, if any pricing differential exists, minority borrowers appear to pay slightly lower rates, as do those borrowers in Zip codes with a larger percentage of black or Hispanic residents or a higher unemployment rate. Mortgage rates are also lower in locations that previously had higher rates of house price appreciation. These results suggest some economies of scale in subprime lending. Yet there are important caveats: we are unable to measure points and fees at loan origination, and the data do not indicate whether borrowers might have qualified for less expensive conforming mortgages.
    Date: 2009

This issue is ©2009 by Roberto J. Santillán–Salgado. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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