Prudential policies and their impact on credit in the United States

We analyze how two types of recently used prudential policies affected the supply of credit in the United States. First, we test whether the U.S. bank stress tests had any impact on the supply of mortgage credit. We find that initiation of the Comprehensive Capital Analysis and Review (CCAR) stress tests in 2011 had a negative effect on the share of jumbo mortgage originations and approval rates at stress-tested banks, whereby banks with worse capital positions were impacted more negatively. Second, we analyze the impact of the 2013 Supervisory Guidance on Leveraged Lending and subsequent 2014 FAQ notice, which clarified expectations on the Guidance. We find that the institution-specific share of speculative-grade term-loan originations decreased notably at regulated banks after the FAQ notice, especially at banks with greater market share for such loans.     

The Impact of the 2007 Liquidity Shock on Bank Jumbo Mortgage Lending

This paper explores the consequences of the collapse of the private‐label residential mortgage‐backed securities market in 2007 on banks’ originations of jumbo mortgages. We show that jumbo lending declined by more at banks that were more dependent on this market and were less well capitalized. In contrast, banks that had little dependence on this market and were well capitalized increased jumbo originations. These findings highlight how dependence on the secondary market may cause amplification of financial shocks, and the potential value of capital requirements that are higher during periods of economic growth in mitigating the amplification effects.     

Determinants of the ARM Share of FHA and Conventional Lending

Loan-choice research has generally examined the determinants of fixed-rate mortgage (FRM) versus ARM lending in the single-family conventional market. Little attention has been paid to the significant differences in ARM lending between the GSE conforming and jumbo markets, as well as differences in the FHA market. For example, the ARM share of jumbo originations is generally two to three times that of the conforming market. This article extends past analysis by examining the determinants of ARM market share in the conventional conforming, jumbo, and FHA markets. Mortgage-pricing variables and the slope of the Treasury yield curve, a proxy for expectations of the time path of ARM indexes, were generally found to be significant. Further, the geographic shift in FHA lending toward the California market since 1992 was found to explain a significant part of the increase in the ARM share of FHA originations during the mid-1990s.     

土地资产价格波动与经济中的流动性供给——基于以地融资视角的研究

本文通过构建理论模型探讨土地资产价格波动与流动性供给之间的关系。在本文模型中,土地兼具生产资本与抵押资产属性,银行贷款同时受到投资需求、抵押品价值与信贷额度的约束。本文主要结论是:(1)土地资产价格在低于一个由基础货币供给决定的临界值后,能影响企业的抵押品价值并反映投资需求变化,故而与存款货币流动性供给正相关。这也使土地资产价格变化与企业杠杆周期一致且具有“预期自我实现”特征。(2)基础货币供给能够通过影响土地的流动性价值的方式来引导土地资产价格,前提是央行可掌握土地资产价格外生变化的原因。(3)信贷资产证券化会提高存款货币供给与土地价格的关联度,但也会削弱基础货币供给对土地价格的引导能力。本文的研究有助于认识土地资产价格与货币政策效果以及系统性金融风险的关联机制,为房地产调控政策提供启示。     

Financial regulation and securitization: Evidence from subprime loans

We examine the consequences of existing regulations on the quality of mortgage loans originations in the originate-to-distribute (OTD) market. The information asymmetries in the OTD market can lead to moral hazard problems on the part of lenders. We find, using a plausibly exogenous source of variation in the ease of securitization, that the quality of loan origination varies inversely with the amount of regulation: more regulated lenders originate loans of worse quality. We interpret this result as a possible evidence that the fragility of lightly regulated originators’ capital structure can mitigate moral hazard. In addition, we find that incentives which require mortgage brokers to have ‘skin in the game’ and stronger risk management departments inside the bank partially alleviate the moral hazard problem in this setting. Finally, having more lenders inside a mortgage pool is associated with higher quality loans, suggesting that sharper relative performance evaluation made possible by more competition among contributing lenders can also mitigate the moral hazard problem to some extent. Overall, our evidence suggests that market forces rather than regulation may have been more effective in mitigating moral hazard in the OTD market. The findings caution against policies that impose stricter lender regulations which fail to align lenders’ incentives with the investors of mortgage-backed securities.     

CRA Lending in a Changing Context: Evidence of Interaction with FHA and Subprime Originations

This article uses a unique demonstration program to examine the interaction of CRA-related lending with subprime and FHA lending activity. Specifically, the empirical analysis identifies the extent to which the origination of a CRA mortgage substitutes for FHA and subprime originations during the period 1998–2006. The results suggest that in the years prior to the expansion of the subprime market (1998–2001), the origination of CRA loans carried a small substitution effect with respect to FHA originations, with little to no impact on subprime originations. Conversely, during the years of the subprime industry’s growth (2002–2006), CRA originations substituted at a much higher rate for high-cost originations. These findings are suggestive about the dynamic role of community reinvestment lending within the changing context of the broader mortgage market. To the extent that CRA originations carry lower foreclosure risk than many subprime products, they also carry implications for the extent of neighborhood externalities in the wake of the subprime foreclosure crisis.     

Monetary Policy,Bank Lending,and the Risk‐Pricing Channel

This paper identifies a monetary policy channel through the risk pricing of bank debt in the market for jumbo certificates of deposit (jumbo CDs). Adverse policy shocks increase debt holder perceptions of bank default, increasing the risk premia for some banks, thereby decreasing their external funding of loans. The results show that contractionary policy increases the sensitivity of jumbo‐CD spreads to leverage and asset risk for small banks, and to leverage for large banks. The results also show a distributional and aggregate effect on banking system jumbo CDs and total loans, producing a risk‐pricing (or market discipline) channel. This channel has implications for monetary and regulatory policies, and financial stability.     

Exporting Liquidity: Branch Banking and Financial Integration

Using exogenous liquidity windfalls from oil and natural gas shale discoveries, we demonstrate that bank branch networks help integrate U.S. lending markets. Banks exposed to shale booms enjoy liquidity inflows, which increase their capacity to originate and hold new loans. Exposed banks increase mortgage lending in nonboom counties, but only where they have branches and only for hard‐to‐securitize mortgages. Our findings suggest that contracting frictions limit the ability of arm's length finance to integrate credit markets fully. Branch networks continue to play an important role in financial integration, despite the development of securitization markets.     

Finance companies in Mexico: Unexpected victims of the global liquidity crunch

We study the connection between the global liquidity crisis and the severe credit crunch experienced by finance companies (SOFOLES) in Mexico using firm-level data between 2001 and 2011. Our results provide supporting evidence that, as a result of the liquidity shock, SOFOLES faced severely restricted access to their main funding sources (commercial bank loans, loans from other organizations, and public debt markets). After controlling for the potential endogeneity of their funding, we find that the liquidity shock explains 64 percent of SOFOLES’ credit contraction during the recent financial crisis (2008–2009). We use our estimates to disentangle supply from demand factors as determinants of the credit contraction. After controlling for the large decline in loan demand during the financial crisis, our findings suggest that supply factors (such as nonperforming loans and lower liquidity buffers) also played a significant role. Finally, we find that financial deregulation implemented in 2006 may have amplified the effects of the global liquidity shock.     

Global retail lending in the aftermath of the US financial crisis: Distinguishing between supply and demand effects

This paper examines the broader effects of the US financial crisis on global lending to retail customers. In particular we examine retail bank lending in Germany using a unique data set of German savings banks during the period 2006 through 2008 for which we have the universe of loan applications and loans granted. Our experimental setting allows us to distinguish between savings banks affected by the US financial crisis through their holdings in Landesbanken with substantial subprime exposure and unaffected savings banks. The data enable us to distinguish between demand and supply side effects of bank lending and find that the US financial crisis induced a contraction in the supply of retail lending in Germany. While demand for loans goes down, it is not substantially different for the affected and nonaffected banks. More important, we find evidence of a significant supply side effect in that the affected banks reject substantially more loan applications than nonaffected banks. This result is particularly strong for smaller and more liquidity-constrained banks as well as for mortgage as compared with consumer loans. We also find that bank-depositor relationships help mitigate these supply side effects.     

Syndicated Leveraged Loans During and After the Crisis and the Role of the Shadow Banking System

In an article published in this journal in 1998, Nobel laureate Merton Miller argued that one of the best weapons available to national economies in their defense against the macroeconomic effects of banking crises is the availability of non‐bank financial institutions and products—or what we now refer to as the “shadow banking system.” Although Miller may have exaggerated the independence of bank‐ and market‐based sources of financing, the author argues that events during and after the recent crisis have shown Miller's claims about the importance of non‐bank investors in the provision of credit to be fundamentally correct. Critics of securitization and the shadow banking system tend to focus on the subprime mortgage story in which the sudden re‐pricing of credit risk and the resulting disappearance of investment demand for ABCP, private‐label mortgage‐related ABS, and ABS CDOs created unexpected and significant downward price pressure on those asset types. But the leveraged loan market tells a very different story. In contrast to the near complete disappearance of private mortgage securitizations, the extraordinary recovery of the U.S. syndicated leveraged loan market demonstrates that the relation between commercial and shadow banking has proved to be a highly productive and resilient one—and very much a two‐way street. When leveraged loans and CLOs experienced problems from 2007 through 2009 due primarily to the widespread liquidity and credit market disruptions that affected essentially all structured credit products, institutional investors in leveraged loans disappeared and the leveraged loan primary market imploded. But when institutional participants recognized the value of the underlying asset—corporate loans—and regained confidence in shadow‐banking products, leveraged lending by banks recovered quickly and dramatically. This outcome is viewed as vindicating Professor Miller's statement about the benefits of shadow markets and securitization— namely, the role of non‐bank investors in diversifying the risk of credit creation while at the same time improving the price discovery process in different markets. The recent history of the U.S. leveraged loan market demonstrates that shadow banking system participants play a critical role in meeting the total demand for such loans, and that the ebbs and flows from institutional leveraged loan markets are strongly connected with the health and integrity of the underlying leveraged bank loan market.     

贷款转让对道德风险监督的影响研究

贷款转让是银行可规避诸多监管而获得低成本流动性的一种有效途径。本文以控制借款人道德风险为目的,采用效用函数分析了不同贷款转让情景下银行监督水平的最优选择。研究结果表明,贷款转让比例越高,边际收益递减阻碍了银行监督水平,可能扩大借款人的道德风险。投资者承担合理监督成本是激励银行实施最优监督水平的一条有效措施。除了承担合理监督成本外,贷款投资者对贷款的合理定价也是激励银行监督借款人的一个重要积极因素。     

FHA vs. Subprime Mortgage Originations: Is FHA the Answer to Subprime Lending?

We analyze originations of mortgages guaranteed by the Federal Housing Administration (FHA) and of subprime mortgages—loans that dominate the non-prime mortgage market for riskier borrowers. Using home purchase and refinance loans data for 2005, we estimate that a sizeable number of borrowers who got subprime loans would have qualified for FHA loans, implying a potential net flow of borrowers from subprime to FHA, especially for refinance loans at a rate of about 30%. Also, consistent with the FHA’s modernization proposal to increase its loan limits, we find that increasing the limits on FHA loans could help to attract borrowers, mostly of home purchase loans, who are likely to be constrained by the lower-priced house limits. Our findings are generally in line with the recent increased flow of mortgages to FHA, and suggest that FHA loans could be the answer to the current subprime lending crisis.     

信贷与资产价格关系研究——来自中国房地产市场的证据

货币政策与资产价格之间的关系一直以来都是学术界研究的重点,但从房地产信贷视角分析房地产价格的文献却相对较少。本文基于多元MGARCH—BEKK模型和GRACH均值方程模型分析了房地产信贷、货币供应量与房地产价格的波动相关性以及它们的各种波动对房地产价格的影响。研究发现,房地产信贷增长的波动能影响房地产价格的增长,而货币供应量的波动,对房地产价格增长影响不显著。同时实证分析显示在对房价的调控中,房地产信贷的调控是抑制房价波动的一个工具选项。以银行信贷为主的货币供应量已经不能全面反映社会的流动性状况。与货币供应量相比,社会融资总量指标与实体经济指标的联系更加紧密。     

Risk Overhang and Loan Portfolio Decisions: Small Business Loan Supply before and during the Financial Crisis

We estimate a structural model of bank portfolio lending and find that the typical U.S. community bank reduced its business lending during the global financial crisis. The decline in business credit was driven by increased risk overhang effects (consistent with a reduction in the liquidity of assets held on bank balance sheets) and by reduced loan supply elasticities suggestive of credit rationing (consistent with an increase in lender risk aversion). Nevertheless, we identify a group of strategically focused relationship banks that made and maintained higher levels of business loans during the crisis.     

Bank risk and monetary policy

We find evidence of a bank lending channel operating in the euro area via bank risk. Financial innovation and the wider use of new ways of transferring credit risk have tended to diminish the informational content of standard bank balance sheet indicators. We show that bank risk conditions, as perceived by financial market investors, need to be considered, together with the other indicators (i.e., size, liquidity and capitalization), traditionally used in the bank lending channel literature to assess banks’ ability and willingness to supply new loans. Using a large sample of European banks, we find that banks characterized by lower expected default frequency are able to offer a larger amount of credit and to better insulate their loan supply from monetary policy changes.     

Bank and Nonbank Lenders and the Commercial Mortgage Market

This paper develops an equilibrium model of the commercial mortgage market that includes the sequence from commitment to origination and allows testing for differences by type of lender. From borrowers, loan demand is based on the income yield, capital gains, and expectations about return distributions. Lenders use prices such as mortgage rates and their distributions, and quantities in underwriting standards. There are separate equilibria in the markets for loan commitments and originations. Bank and nonbank lenders are not restricted to the same lending technology, nor to the weights placed on mortgage rates as opposed to underwriting standards. Empirical results for the United States commercial mortgage market indicate that banks use interest rates in allocating credit while nonbanks rely on underwriting standards, notably the loan-to-value ratio. A consequence is that nonbanks have a clientele incentive towards making low cap rate loans compensated by low loan-to-value ratios.     

The sensitivity of bank stock returns to real estate

According to the Federal Reserve Board, banking firms have recently been shifting significantly larger portions of their loan portfolios into real estate. This increase in real estate lending has caused concern about the continuing economic health of banks on the part of state and federal regulators, since changes in real estate returns, evidenced by changes in property value, can potentially have a significant impact on bank default risk and profit-ability. However, concerned parties do not seem to have explicitly considered the relationship between mortgage default risk and the specific characteristics of real estate investments.This study examines the sensitivities of stock returns for different bank groups, based on the percentage of total loans in real estate and the percentage of loans in five different mortgage categories (construction and development loans, farmland loans, one- to four-family residential loans, multifamily residential loans, and nonresidential and nonfarm loans), to changes in real estate market returns. This is done by developing and using a three-index model.The results of this study indicate that bank stocks, overall, are very sensitive to changes in real estae returns. Banks, with a larger portion of their total loans invested in all types of real estate loans, except farmland loans, are most sensitive to changes in real estate returns.     

English commercial bank liquidity, 1860-1913

This article presents new half-yearly time series for the asset ratios of commercial banks in England and Wales, 1860-1913. The series reveal new evidence on the nature of the banks' business and are, therefore, relevant to the debate on the role of banks in British economic development. The new estimates are used to examine trends and short-term changes in bank liquidity. Analysis is concerned with the changing stability of bank asset structure and with substitutability across different asset ratios. The main finding is of a sharp, long-term increase in liquidity and a concomitant decline in bank credit to the non-bank, private sector. The article also highlights the significance of short-term shocks to the trend increase in bank liquidity. The new findings are supportive of the argument that, over time, English banks became less involved with the non-bank private sector. In general, the results confirm that the English and Welsh bank asset structure became more liquid over time. However, no detailed breakdown of bank loans to the non-bank, private sector (for example, between business loans and personal loans), is available for this period. Moreover, the current study offers no evidence as to the trend in financial provision to the business sector from institutions other than the commercial banks. Nevertheless, the results are clear in showing a strong upward trend in commercial bank liquidity and a relative decline in private sector credit provision by the commercial banks.     

Funding Liquidity without Banks: Evidence from a Shock to the Cost of Very Short‐Term Debt

In 2011, Colombia instituted a tax on repayment of bank loans, which increased the cost of short‐term bank credit more than long‐term credit. Firms responded by cutting short‐term loans for liquidity management purposes and increasing the use of cash and trade credit. In industries in which trade credit is more accessible (based on U.S. Compustat firms), we find substitution into accounts payable and little effect on cash and investment. Where trade credit is less available, firms increase cash and cut investment. Thus, trade credit provides an alternative source of liquidity that can insulate some firms from bank liquidity shocks.