Banks’ lending behavior and monetary policy: evidence from Sweden

The main purpose of this paper is to investigate the aggregate data about bank loans which may hide significant information about the monetary transmission mechanism. This study, by disaggregating bank loans data and using the relevant interest rates in Sweden, investigates the behaviour of banks after a monetary policy tightening. By using an unrestricted VAR model and impulse response analysis, our results show that a shock on the policy rate affects the main components of the banks’ loan portfolios differently. Initially, banks do not reduce lending to firms and households and they present a sluggish reaction concerning the relevant interest rates. On the contrary, they reduce lending to mortgage credit institutions significantly since real estate lending can be considered as a risky long-term investment. Moreover mortgage credit institutions reduce lending for housing purposes to non-bank public. This reduction is mainly driven by flexible rate loans and loans secured on tenant owned apartments. Consequently, theses actions have a significant effect on real economic activity, by amplifying the initial shock from the tightening monetary policy. The latter result provides evidence of the bank lending channel in Sweden working via mortgage lending and could be very important for policy makers.     

Economic Consequences of Transparency Regulation: Evidence from Bank Mortgage Lending

We examine the economic consequences of a rule designed to improve consumers' understanding of mortgage information. The 2015 TILA-RESPA Integrated Disclosures rule (TRID) simplifies the mortgage disclosures provided to consumers. As a consequence, TRID-affected mortgages become a less attractive investment opportunity to banks. Our main results document that mortgage applications affected by TRID are less likely to be approved following the rule's effective date. We find evidence consistent with both a decrease in consumers' information processing costs and an increase in banks' secondary market frictions, providing insight into the potential channels through which this reduction in mortgage credit operates. We also find that banks partially compensate for reduced mortgage lending by increasing small business lending, and that fintechs absorb mortgage demand in areas with reduced mortgage lending by banks. Our study documents real actions that firms take in response to disclosure transparency regulation and contributes to the literature on the economic consequences of such regulation.     

Fintech and access to finance

This article surveys research on the effects of digitalization on access to finance. We focus the review on access through fintech. We review the growth of three main fintech technologies, fintech lending (incl. peer-to-peer lending), crowdfunding and initial coin offerings. We discuss existing evidence on how fintech affects access to finance for firms and investors and consider the regulatory challenges it poses. We incorporate the papers in this special issue, underlining their significant contributions to our understanding of the digitalization of finance and its effects. Finally, we discuss the challenges of research in the digital finance area and propose some new avenues for future research.     

Conference on Housing,Stability, and the Macroeconomy: International Perspectives

This article provides an introduction to the JMCB special issue on housing bubbles, the global financial crisis, and the ensuing recessions in countries that experienced housing busts. We focus on five themes that are important for policymakers and researchers alike: the domestic and international factors driving housing booms and busts, the relevance of the housing sector for the real economy, how monetary policy should react to housing booms and busts, how housing and mortgage finance reform could affect financial stability, and the broad lessons learned for macroeconomics and macroprudential policy.     

Discrimination and Mortgage Lending in Boston: The Effects of Model Uncertainty

In 1992 the Federal Reserve Bank of Boston conducted an analysis that examined the effects of race on mortgage lending in the Boston Metropolitan Statistical Area. Collecting data on all the possibly relevant information used in the lending process, they find when controlling for a subset of this information that race has a statistically significant effect on the decision to reject a mortgage application. Other researchers, using the same dataset, have shown that analysis of alternative subsets of the variables significantly reduces the effects of race. While theory should guide variable selection, there is often no unique theory to explain social science. In such cases, uncertainty in model specification causes one to be uncertain as to the true effects of the variables of interest. This paper accounts for the effects of model uncertainty by using Bayesian model averaging and finds a reduced effect of race and weakened evidence concerning the statistical significance of the effect.     

Borrower Mobility, Adverse Selection, and Mortgage Points

This paper analyzes a simple mobility-based model of mortgage lending and uses the results to illuminate the issue of mortgage points. The model predicts the points/interest-rate trade-off observed in the market, and it also predicts that mobile borrowers choose low-points/high-rate contracts from the available menu, in conformance with conventional wisdom. These outcomes are shown to be a result of adverse selection, which arises because of the lender′s inability to distinguish the mobility characteristics of borrowers. Empirical evidence is also presented showing the presence of a points/interest-rate trade-off in the market. In addition, relying on a proxy variable, the results establish that borrowers choose contracts from this menu according to mobility. Journal of Economic Literature Classification Numbers: G21.     

Where Credit Is Due: Residential Mortgage Finance in Canada, 1901 to 1954

The experience of Canada in the first half of this century indicates that the importance of institutional mortgage lending for the growth of homeownership can be overstated. Home ownership rates in Canada and the United States were similar, but many fewer Canadians than Americans relied on lending institutions. Fewer incurred debt of any sort. A case study of Hamilton, Ontario, based on land titles records indicates that this was especially true during the interwar years. No Canadians lived in large metropolitan areas, where mortgage debt was most prevalent, while many built in stages as their finances allowed. Moreover, even in the early 1950s, half of all residential mortgage debt in Canada was held by private individuals, with brokers playing an important role. Despite the importance of the personal sector, above all in the markets for older homes and junior mortgages, the Canadian government made no effort to improve the way in which it operated.     

Asymmetric information and price competition in small business lending

This paper examines the relationship between bank lending rates and their cost of funds in New Zealand. Our results show that on average mortgage rates respond more quickly to changes in the cost of funds than base business lending rates. We also find an asymmetry in the initial (short-run) response of banks to changes in funding costs; in particular, our results show banks adjust mortgage rates downwards faster than upwards. The speed to which lending rates revert back to their equilibrium relationship with funding costs varies across the lending markets. We find the adjustment speed is faster when mortgage rates are below equilibrium, whereas it is slower when business lending rates are above long-run levels in relation to funding costs. Our analysis suggests that banks prefer the plain-vanilla type of lending such as mortgages in comparison to small business lending consistent with asymmetric information associated with business loans.     

消费金融创新与监管:欧美经验、教训与启示

本文针对消费金融市场金融服务和产品不断创新化和复杂化的趋势以及消费者金融素养参差不齐的现状,从消费者、金融机构和监管部门三个角度分析目前消费金融市场的问题,综述近年来欧美颁布的重要消费金融监管政策和计划,涵盖信用卡借贷、抵押贷款再融资、贷款合同条款再协商、消费者保护等领域,详细阐述其实施的经济效果,以期为中国未来政策的制定提供有效参考。从发达国家消费金融监管的经验教训来看,应重视信息呈现方式的经济效果,完善披露制度,制定政策时需考虑同目标不同政策组合的合理性与可行性。     

The Interaction between Mortgage Financing and Housing Prices in Greece

Although the close empirical relationship between the evolution of mortgage lending and housing prices is well established in the literature, the direction of causation is less clear from a theoretical standpoint. We apply multivariate cointegration techniques in order to address this issue empirically for the Greek economy. Our results, based on a cointegration relationship that we identify as a mortgage loan demand equation, indicate that housing prices do not adjust to disequilibria in the market for housing loans. This suggests that in the long run the causation does not run from mortgage lending to housing prices. In the short run we find evidence of a contemporaneous bi-directional dependence.

Borrower Self-Selection,Underwriting Costs,and Subprime Mortgage Credit Supply

In the U.S., households participate in two very different types of credit markets. Personal lending is characterized by continuous risk-based pricing in which lenders offer households a continuous distribution of borrowing possibilities based on estimates of their creditworthiness. This contrasts sharply with mortgage markets where lenders specialize in specific risk categories of borrowers and mortgage supply is stepwise linear. The contrast between continuous lending for personal loans and discrete lending by specialized lenders for mortgage credit has led to concerns regarding the efficiency and equity of mortgage lending. This paper sheds both theoretical and empirical light on the differences in the two credit markets. The theory section demonstrates why, in a perfectly competitive credit market where all lenders have the same underwriting technology, mortgage credit supply curves are stepwise linear and lenders specialize in prime or subprime lending. The empirical section then provides evidence that borrowers are being effectively sorted based on risk characteristics by the market.     

Central bank intervention

This special issue of the Journal of International Finance, Institutions and Money contains 11 articles that consider aspects of central bank intervention. It is particularly timely to publish such a special issue since the topic of central bank intervention has been an important issue in international finance during the last decade. Monetary policy, trading rules, econometric evidence of the effects of intervention on exchange rates and future direction on research in this area constitute the sections in this special issue.     

The market for certification by external parties: Evidence from underwriting and banking relationships

This paper provides evidence that an underwriter is better able to certify an equity issue if it has a lending relationship with the firm. An announcement of being underwritten by the firm’s lending-relationship bank reduces ex post information asymmetry, thereby improving the announcement return. Further, because this reduction in information asymmetry effectively disseminates what was previously the lending bank’s private information, it decreases its affiliated market maker’s information advantage, thus reducing its contribution to price discovery and liquidity. These results provide evidence on the value of information production and transmission by banks, and more generally on the role of external parties in reducing information asymmetry.     

Bank Branch Presence and Access to Credit in Low‐ to Moderate‐Income Neighborhoods

Banks specialize in lending to informationally opaque borrowers by collecting soft information about them. Some researchers claim that this process requires a physical presence in the market to lower information collection costs. This paper provides evidence in support of this argument in the mortgage market for low‐income borrowers whose access to credit is limited by their inadequate credit histories. Mortgage originations increase and interest spreads decline when there is a bank branch located in a low‐ to moderate‐income neighborhood.     

Do banks have a future?: A study on banking and finance as we move into the third millennium

Are banks special intermediaries? Do they play any unique role in the economy? And if so, will they retain their specialness in the ever-faster changing world of finance? The rapid evolution of finance over the last two decades and the breathtaking “e-age” revolution have persuaded many that, eventually, banks will be indistinguishable from other financial intermediaries since all their functions can, at least as efficiently, be carried out by nonbanks. This study re-explores the issue of the specialness of banks in light of the large existing literature on the subject, and presents an approach which identifies the banks' specialness with their unique capacity to lend out claims on their own debt which the public accepts and uses as money. The study discusses various structural and policy implications deriving from the approach, and draws on it to point to the continuing relevance of banking in a world where nonbanks are taking business away from banks, lending to production has become relatively less important, and the use of e-money may soon be dominating financial transactions.     

Mortgage Lending, Race, and Model Specification

This study examines the role of race in home mortgage lending by investigating the sensitivity of race estimates to variations in model specification. I compare parameter estimates based on a statistical model utilized by the Federal Reserve Bank of Boston, using a subset of the data that corresponds to FDIC-supervised institutions, with estimates obtained from several alternative variations specified to reflect information obtained from reviews of the mortgage loan application files. Estimates of the race effect are shown to be highly sensitive to the assumptions that underlie the model; minor modifications in model specification are sufficient to eliminate the race effect. The empirical results suggest that the statistical models used to evaluate the impact of race in mortgage lending may not provide reliable information about lending bias.     

Risk versus Demographics in Subprime Mortgage Lending: Evidence from Three Connecticut Cities

This paper analyzes patterns in subprime residential mortgage lending using 2006 Home Mortgage Act Disclosure data for the cities of Bridgeport, New Haven and Waterbury, Connecticut. The analysis applies models presented in earlier research and has the objective of assessing the relative importance of demographic versus risk factors in subprime mortgage lending decisions. Regression equations are estimated for census tracts and individual borrowers and include demographic variables and property risk measures. The results find race and ethnicity to be significant determinants of subprime lending in the borrower equations that include the full set of risk measures. Neighborhood educational levels are found to have an inverse and often significant association with subprime mortgage loans. Property risk measures present mixed results regarding their significance in subprime lending, suggesting that risk may have played less of a role in loan originations in 2006 than it did in earlier studies.     

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.     

What determines the composition of banks’ loan portfolios? Evidence from transition countries

This paper explores how bank characteristics and the institutional environment influence the composition of banks’ loan portfolios. We use a new and unique data set based on the EBRD Banking Environment and Performance Survey (BEPS), which was conducted for 220 banks in 20 transition countries. We show that bank ownership, bank size, and legal creditor protection are important determinants of the composition of banks’ loan portfolios. In particular, we find that foreign banks play an active role in mortgage lending. Moreover, banks that perceive pledge and mortgage laws to be of high quality choose to focus more on mortgage lending.     

Seeing is important: the usefulness of video information in P2P

P2P lending is an important research subject of rising internet finance research. This paper uses unique data from Renrendai, a leading platform in China, to test the influence of video information on P2P lending behavior. Results suggest that, first, the lower the borrower's credit rating is, the more likely they are to provide video information. Second, compared to the video‐information‐absent borrowers, the otherwise borrowers can get easier access to a loan and offer a lower interest rate. These results indicate that compared to text messages, video information can increase the borrower's creditworthiness and reduce the transaction risk. Thereupon seeing is important in online P2P lending. Third, when the borrower's credit rating is lower, the video effect is significant. The study makes sense in terms of the enrichment of P2P lending literature and the enlightenment on decision‐making of both lenders and borrowers.