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on Banking |
| By: | Marina Emiris (Economics and Research Department, NBB); François Koulischer (University of Luxembourg, Department of Finance) |
| Abstract: | We study how changes in interest rates affect the borrowing of households and the distribution of debt within the population. In a model of household borrowing with credit constraints and endogenous house prices, we show that less constrained households with more pre-existing housing wealth increase their borrowing most when interest rates fall. We then use unique loan level data on the universe of household credit in Belgium to document a shift in the distribution of debt over age, with older households borrowing more as interest rates fell in the last decade. First-time borrowers, who are more likely to be constrained, do not contribute to the rise in household debt. To identify the elasticity of household debt to the interest rate, we use regulatory data on foreign exposures of banks and on the location of bank branches. We find that a 1 percentage point fall in the interest rate is associated with a 15% growth in household debt. |
| Keywords: | Interest Rates, Household Debt, Mortgages, Credit Constraints |
| JEL: | D14 E43 E58 G51 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:202103-398&r= |
| By: | Mikhail Mamonov; Anna Pestova |
| Abstract: | Are disruptions of the mortgage market a consequence of financial imbalances accumulated in the past? In this paper, we study the effects of positive and negative credit supply (CS) shocks on subsequent household defaults on debt over the last four decades in U.S. states. We apply sign restrictions within a VAR framework to isolate state-level CS shocks, and identify that 1984 and 2004 were the years of systemic, countrywide, positive CS shocks whereas 1989 and 2009 brought systemic negative shocks. Further, by employing a difference-in-differences framework, we find that both positive and negative CS shocks lead to greater household defaults in the future if they also increase mortgage-to-income ratios. We show that the CS shock-induced (i) shifts of employment between the tradable and non-tradable sectors, (ii) changes in household income and (iii) in house prices facilitate the accumulation of default risks. Our results indicate that positive CS shocks occurred in 1984 did not raise household defaults by more in more exposed states compared to less exposed states because the shocks increased both future income and mortgage debt, while not affecting mortgage-to-income ratios. In contrast, the 1989, 2004 and 2009 CS shocks increased mortgage-to-income ratios in subsequent years, thereby raising debt delinquencies and household defaults. These results provide further empirical evidence to theories of endogenous credit cycles. |
| Keywords: | household finance; banking; credit supply; financial instability; mortgage; difference-in-differences; VARs, U.S. states; PSID; CEX; |
| JEL: | C34 G21 G33 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp691&r= |
| By: | Bridet, Luc (University of St Andrews); Schwardmann, Peter (LMU Munich) |
| Abstract: | We propose a simple model of borrower optimism in competitive lending markets with asymmetric information. Borrowers in our model engage in self-deception to arrive at a belief that optimally trades off the anticipatory utility benefits and material costs of optimism. Lenders’ contract design shapes these benefits and costs. The model yields three key results. First, the borrower’s motivated cognition increases her material welfare, regardless of whether or not she ends up being optimistic in equilibrium. Our model thus helps explain why wishful thinking is not driven out of markets. Second, in line with empirical evidence, a low cost of lending and a booming economy lead to optimism and the widespread collateralization of loans. Third, equilibrium collateral requirements may be inefficiently high. |
| Keywords: | optimal expectations; motivated cognition; wishful thinking; financial crisis; lending markets; screening; |
| JEL: | D86 D82 G33 |
| Date: | 2020–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:238&r= |
| By: | Caroline PERRIN (LaRGE Research Center, Université de Strasbourg); Laurent WEILL (LaRGE Research Center, Université de Strasbourg) |
| Abstract: | Literature has found that women outperform men in terms of loan repayment. We can therefore question whether more gender equality in access to credit fosters financial stability. We test this hypothesis using cross-country data on financial inclusion from the World Bank’s Global Findex database and bank-level data on financial stability. We perform regressions at the bank level to check if the female-to-male ratio of access to credit affects financial stability. We find evidence that the gender gap in access to credit exerts a detrimental influence on financial stability. This finding is confirmed in robustness checks that control for alternative measures of financial stability and endogeneity. Therefore our findings support the view that enhancing access to credit for women relative to men is beneficial for financial stability. |
| Keywords: | financial inclusion, access to credit, financial stability, gender equality. |
| JEL: | G21 J16 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2021-02&r= |
| By: | José Renato Haas Ornelas; Alvaro Pedraza; Claudia Ruiz-Ortega; Thiago Christiano Silva |
| Abstract: | We study bank lending when private banks distribute subsidized loans. In Brazil, private banks operate in two credit markets: a competitive free market and an earmarked market characterized by government-funded loans at below-market interest rates. We find that banks are more likely to extend earmarked loans to larger firms and firms with existing relationships. We further document a novel cross-selling strategy whereby banks increase the price of free-market loans for riskier borrowers that obtain earmarked credit. |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:548&r= |
| By: | Cyrus Aghamolla; Pinar Karaca-Mandic; Xuelin Li; Richard T. Thakor |
| Abstract: | This study examines the link between credit supply and hospital health outcomes. Using detailed data on hospitals and the banks that they borrow from, we use bank stress tests as exogenous shocks to credit access for hospitals that have lending relationships with tested banks. We find that affected hospitals shift their operations to enhance their profit margins in response to a negative credit shock, but reduce the quality of their care to patients across a variety of measures. In particular, affected hospitals exhibit significantly lower attentiveness in providing timely and effective treatment and procedures, and are rated substantially lower in patient satisfaction. This decline in care quality is reflected in health outcomes: affected hospitals experience a significant increase in risk-adjusted, unplanned 30-day readmission rates of recently discharged patients and in risk-adjusted 30-day patient mortality rates. Overall, the results indicate that access to credit can affect the quality of healthcare hospitals deliver, pointing to important spillover effects of credit market frictions on health outcomes. |
| JEL: | G21 G32 I11 I15 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28709&r= |
| By: | Christian Haddad; Lars Hornuf |
| Abstract: | We study the impact fintech startups have on the performance and the default risk of traditional financial institutions. We find a positive relationship between fintech startup formations and incumbent institutions’ performance for the period from 2005 to 2018 and a large sample of financial institutions from 87 countries. We further analyze the link between fintech startup formations and the default risk of traditional financial institutions. Fintech startup formations decreases stock return volatility of incumbent institutions and decreases the systemic risk exposure of financial institutions. Our findings indicate that the development of fintech startups should be monitored very closely by legislators and financial supervisory authorities, because fintechs not only have a positive effect on the financial sector’s performance, but can also improve financial stability relative to the status quo. |
| Keywords: | fintech, bank performance, default risk, financial stability |
| JEL: | K00 L26 O30 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9050&r= |
| By: | Oliver Hülsewig; Horst Rottmann |
| Abstract: | This paper examines the reaction of house prices in a panel of euro area countries to monetary policy surprises over the period 2010-2019. Using Jordà’s (2005) local projection method, we find that real house prices rise in response to expansionary monetary policy shocks that can be related to unconventional policy measures. In the core countries including Ireland, we also find that lending for house purchases increases relative to nominal output. Thus, household debt rises. |
| Keywords: | Euro area house prices, unconventional monetary policy, local projection method |
| JEL: | E52 E58 E32 G21 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9045&r= |
| By: | Jonathan Chiu; Tsz-Nga Wong |
| Abstract: | Digital platforms, such as Alibaba and Amazon, operate an online marketplace to facilitate transactions. This paper studies a platform's business model choice between accepting cash and issuing tokens, as well as the implications for welfare, resiliency, and interoperability. A cash platform free rides on the existing payment infrastructure and profits from collecting transaction fees. A token platform earns seigniorage, albeit bearing the costs of setting up the system and holding reserves to mitigate the cyber risk. Tokens earn consumers a return, insulating transactions from the liquidity costs of using cash, but also expose them to the remaining cyber risk. The platform issues tokens if the interest rate is high, the platform scope is large, and the cyber risk is small. Unbacked floating tokens with zero transaction fees or interest-bearing stablecoins can implement the equilibrium business model, which is not necessarily socially optimal because the platform does not internalize its impacts on off-platform activities. The model explains why Amazon does not issue tokens but Alipay issues tokens circulatable outside its Alibaba platforms. Regulations such as a minimum reserve requirement can reduce welfare. |
| Keywords: | Digital currencies and fintech; Monetary policy; Payment clearing and settlement systems |
| JEL: | E5 L5 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:21-19&r= |