Amid the emerging dominance of nonbanks, small banks use key financing advantages to persist in the mortgage market. We provide evidence of the heterogeneous impact of two shocks to the supply of mortgage credit: postcrisis regulatory burden and GSE financing cost changes. Small banks exploit regulation disproportionately affecting the largest four banks (Big4) and their ability to lend on balance sheet to strongly substitute for the retreating Big4. The erasure of guarantee fee (g-fee) discounts for large lenders facilitates small bank growth in GSE lending. Small banks also grow balance sheet loans in areas more exposed to g-fee hikes.
{"title":"Small Bank Lending in the Era of Fintech and Shadow Banks: A Sideshow?","authors":"Taylor A. Begley, K. Srinivasan","doi":"10.1093/rfs/hhac038","DOIUrl":"https://doi.org/10.1093/rfs/hhac038","url":null,"abstract":"\u0000 Amid the emerging dominance of nonbanks, small banks use key financing advantages to persist in the mortgage market. We provide evidence of the heterogeneous impact of two shocks to the supply of mortgage credit: postcrisis regulatory burden and GSE financing cost changes. Small banks exploit regulation disproportionately affecting the largest four banks (Big4) and their ability to lend on balance sheet to strongly substitute for the retreating Big4. The erasure of guarantee fee (g-fee) discounts for large lenders facilitates small bank growth in GSE lending. Small banks also grow balance sheet loans in areas more exposed to g-fee hikes.","PeriodicalId":21124,"journal":{"name":"Review of Financial Studies","volume":" ","pages":""},"PeriodicalIF":8.2,"publicationDate":"2022-06-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43959609","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Harjoat S. Bhamra, Christian Dorion, A. Jeanneret, Michael Weber
We develop an asset pricing model with endogenous corporate policies that explains how inflation jointly affects real asset prices and corporate default risk. Our model includes two empirically founded nominal rigidities: fixed nominal debt coupons (sticky leverage) and sticky cash flows. These two frictions result in lower real equity prices and credit spreads when expected inflation rises. A decrease in expected inflation has opposite effects, with even larger magnitudes. In the cross-section, the model predicts that the negative impact of higher expected inflation on real equity values is stronger for low leverage firms. We find empirical support for the model’s predictions.
{"title":"High Inflation: Low Default Risk and Low Equity Valuations","authors":"Harjoat S. Bhamra, Christian Dorion, A. Jeanneret, Michael Weber","doi":"10.1093/rfs/hhac021","DOIUrl":"https://doi.org/10.1093/rfs/hhac021","url":null,"abstract":"\u0000 We develop an asset pricing model with endogenous corporate policies that explains how inflation jointly affects real asset prices and corporate default risk. Our model includes two empirically founded nominal rigidities: fixed nominal debt coupons (sticky leverage) and sticky cash flows. These two frictions result in lower real equity prices and credit spreads when expected inflation rises. A decrease in expected inflation has opposite effects, with even larger magnitudes. In the cross-section, the model predicts that the negative impact of higher expected inflation on real equity values is stronger for low leverage firms. We find empirical support for the model’s predictions.","PeriodicalId":21124,"journal":{"name":"Review of Financial Studies","volume":" ","pages":""},"PeriodicalIF":8.2,"publicationDate":"2022-06-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46469696","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We document racial disparities in auto lending. Combining credit bureau records with borrower characteristics, we find that Black and Hispanic applicants’ approval rates are 1.5 percentage points lower, even after controlling for creditworthiness. In aggregate, this effect crowds out 80,000 minority loans each year. Results are stronger where racial biases are more prevalent and lending competition is lower. Minority borrowers pay 70-basis-point higher interest rates, but default less ceteris paribus, consistent with racial bias rather than statistical discrimination. A major antidiscrimination enforcement policy initiated in 2013, but halted in 2018, reduced unexplained racial differences in interest rates by 60%.
{"title":"Racial Disparities in the Auto Loan Market","authors":"Alexander W. Butler, Erik J. Mayer, J. Weston","doi":"10.1093/rfs/hhac029","DOIUrl":"https://doi.org/10.1093/rfs/hhac029","url":null,"abstract":"\u0000 We document racial disparities in auto lending. Combining credit bureau records with borrower characteristics, we find that Black and Hispanic applicants’ approval rates are 1.5 percentage points lower, even after controlling for creditworthiness. In aggregate, this effect crowds out 80,000 minority loans each year. Results are stronger where racial biases are more prevalent and lending competition is lower. Minority borrowers pay 70-basis-point higher interest rates, but default less ceteris paribus, consistent with racial bias rather than statistical discrimination. A major antidiscrimination enforcement policy initiated in 2013, but halted in 2018, reduced unexplained racial differences in interest rates by 60%.","PeriodicalId":21124,"journal":{"name":"Review of Financial Studies","volume":" ","pages":""},"PeriodicalIF":8.2,"publicationDate":"2022-05-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46116239","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
To understand deviations from covered interest parity (CIP), it is crucial to account for heterogeneity in funding costs across both banks and currency areas. For most market participants, the no-arbitrage relation holds fairly well when implemented using marginal funding costs and risk-free investment instruments. However, a few high-rated banks do enjoy CIP-arbitrage opportunities. Dealers avert inventory imbalances stemming from lower-rated banks’ usage of FX swaps to obtain dollar funding by inducing opposite (arbitrage) flows from high-rated banks. Arbitrage trades are difficult to scale, however, because funding costs increase as soon as arbitrageurs increase positions.
{"title":"Covered Interest Parity Arbitrage","authors":"Dagfinn Rime, Andreas Schrimpf, O. Syrstad","doi":"10.1093/rfs/hhac026","DOIUrl":"https://doi.org/10.1093/rfs/hhac026","url":null,"abstract":"\u0000 To understand deviations from covered interest parity (CIP), it is crucial to account for heterogeneity in funding costs across both banks and currency areas. For most market participants, the no-arbitrage relation holds fairly well when implemented using marginal funding costs and risk-free investment instruments. However, a few high-rated banks do enjoy CIP-arbitrage opportunities. Dealers avert inventory imbalances stemming from lower-rated banks’ usage of FX swaps to obtain dollar funding by inducing opposite (arbitrage) flows from high-rated banks. Arbitrage trades are difficult to scale, however, because funding costs increase as soon as arbitrageurs increase positions.","PeriodicalId":21124,"journal":{"name":"Review of Financial Studies","volume":" ","pages":""},"PeriodicalIF":8.2,"publicationDate":"2022-05-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47899654","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Umit G. Gurun, Jiabin Wu, S. Xiao, Serena Wenjing Xiao
We examine the recent rise of institutional investment in the single-family home rental market and its implications for renters’ welfare. Using institutional mergers to identify local exogenous variation in institutional landlords’ scale and market share, we show that rents increase in neighborhoods where both merging firms owned properties (i.e., overlapped neighborhoods) relative to other nonoverlapped neighborhoods. Meanwhile, the crime rate also significantly decreases in overlapped neighborhoods after mergers. Our findings suggest that while institutional landlords leverage their market power to extract greater surplus from renters, they also improve the quality of rental services by enhancing neighborhood safety.
{"title":"Do Wall Street Landlords Undermine Renters’ Welfare?","authors":"Umit G. Gurun, Jiabin Wu, S. Xiao, Serena Wenjing Xiao","doi":"10.1093/rfs/hhac017","DOIUrl":"https://doi.org/10.1093/rfs/hhac017","url":null,"abstract":"\u0000 We examine the recent rise of institutional investment in the single-family home rental market and its implications for renters’ welfare. Using institutional mergers to identify local exogenous variation in institutional landlords’ scale and market share, we show that rents increase in neighborhoods where both merging firms owned properties (i.e., overlapped neighborhoods) relative to other nonoverlapped neighborhoods. Meanwhile, the crime rate also significantly decreases in overlapped neighborhoods after mergers. Our findings suggest that while institutional landlords leverage their market power to extract greater surplus from renters, they also improve the quality of rental services by enhancing neighborhood safety.","PeriodicalId":21124,"journal":{"name":"Review of Financial Studies","volume":" ","pages":""},"PeriodicalIF":8.2,"publicationDate":"2022-03-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48807207","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We develop a model of psychological-games-played-on-a-network to demonstrate a role for endogenously determined, rationally chosen ethics. Our analysis produces sharp results about contagion of nonethical or ethical behavior and the possible equilibrium configurations of each type of behavior. We find, and quantify, critical densities for clusters of each type of behavior that determine everything about contagion. We introduce society as a third player to investigate ethical failures as externalities. We use these results to show how regulations and network structure can affect whether clusters of ethical behavior can survive and how large they can be in a financial market setting.
{"title":"Financial Market Ethics","authors":"D. Easley, Maureen O'Hara","doi":"10.1093/rfs/hhac015","DOIUrl":"https://doi.org/10.1093/rfs/hhac015","url":null,"abstract":"\u0000 We develop a model of psychological-games-played-on-a-network to demonstrate a role for endogenously determined, rationally chosen ethics. Our analysis produces sharp results about contagion of nonethical or ethical behavior and the possible equilibrium configurations of each type of behavior. We find, and quantify, critical densities for clusters of each type of behavior that determine everything about contagion. We introduce society as a third player to investigate ethical failures as externalities. We use these results to show how regulations and network structure can affect whether clusters of ethical behavior can survive and how large they can be in a financial market setting.","PeriodicalId":21124,"journal":{"name":"Review of Financial Studies","volume":" ","pages":""},"PeriodicalIF":8.2,"publicationDate":"2022-03-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48800740","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Some credit booms result in financial crises. While excessive risk-taking could plausibly explain the boom-to-bust cycle, many investors do not anticipate increasing risk. We show that credit booms may be misunderstood as being driven by high productivity because opaque bank assets disguise risk incentives. Balanced funding relative to productive prospects can sustain prudent lending (good boom), whereas funding imbalances may induce high risk exposure and boost asset prices (bad boom) or lead to asset underpricing and insufficient lending (missed boom). Rational agents drawing inference from prices make mistakes that can amplify the effect of funding imbalances and propagate risk.
{"title":"The Good, the Bad, and the Missed Boom","authors":"E. Perotti, Magdalena Rola-janicka","doi":"10.1093/rfs/hhac014","DOIUrl":"https://doi.org/10.1093/rfs/hhac014","url":null,"abstract":"\u0000 Some credit booms result in financial crises. While excessive risk-taking could plausibly explain the boom-to-bust cycle, many investors do not anticipate increasing risk. We show that credit booms may be misunderstood as being driven by high productivity because opaque bank assets disguise risk incentives. Balanced funding relative to productive prospects can sustain prudent lending (good boom), whereas funding imbalances may induce high risk exposure and boost asset prices (bad boom) or lead to asset underpricing and insufficient lending (missed boom). Rational agents drawing inference from prices make mistakes that can amplify the effect of funding imbalances and propagate risk.","PeriodicalId":21124,"journal":{"name":"Review of Financial Studies","volume":" ","pages":""},"PeriodicalIF":8.2,"publicationDate":"2022-03-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46281860","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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