Search Results
Report
Do Mortgage Lenders Respond to Flood Risk?
Using unique nationwide property-level mortgage, flood risk, and flood map data, we analyze whether lenders respond to flood risk that is not captured in FEMA flood maps. We find that lenders are less willing to originate mortgages and charge higher rates for lower LTV loans that face “un-mapped” flood risk. This effect is weaker for high income applicants, as well as non-banks and small local banks. However, we find evidence that non-banks and local banks are more likely to securitize/sell mortgages to borrowers prone to flood risk. Taken together, our results are indicative that ...
Report
Banks' incentives and the quality of internal risk models
This paper investigates the incentives for banks to bias their internally generated risk estimates. We are able to estimate bank biases at the credit level by comparing bank-generated risk estimates within loan syndicates. The biases are positively correlated with measures of regulatory capital, even in the presence of bank fixed effects, consistent with an effort by low-capital banks to improve regulatory ratios. At the portfolio level, the difference in borrower probability of default is as large as 100 basis points, which can improve the typical loan portfolio?s Tier 1 capital ratio by as ...
Discussion Paper
How Exposed Are U.S. Banks’ Loan Portfolios to Climate Transition Risks?
Much of the work on climate risk has focused on the physical effects of climate change, with less attention devoted to “transition risks” related to negative economic effects of enacting climate-related policies and phasing out high-emitting technologies. Further, most of the work in this area has measured transition risks using backward-looking metrics, such as carbon emissions, which does not allow us to compare how different policy options will affect the economy. In a recent Staff Report, we capitalize on a new measure to study the extent to which banks’ loan portfolios are exposed ...
Report
Insurance Companies and the Growth of Corporate Loans' Securitization
Insurance companies nonupled their CLO investments in the post-crisis period. This growth has far outpaced that of loans and bonds and is characterized by a strong preference for mezzanine tranches over triple-A tranches. Conditional on capital charges, insurance companies invest more in bonds and CLO tranches with higher yields but prefer the latter because these carry higher yields. Preferences increased following the 2010 regulatory reform, resulting in them holding 44 percent of outstanding investmentgrade rated mezzanine tranches. In the process, insurance companies contributed ...
Journal Article
Glass-Steagall and the regulatory dialectic
An explanation of how the Glass-Steagall Act, passed to prohibit U.S. commercial banks from engaging in investment banking activities, has led to the same costly cat-and-mouse game between banks and their regulators as did the prohibition against interstate banking, and an argument that lawmakers should consider banks' incentives when crafting new regulations.
Report
Monetary Policy, Investor Flows, and Loan Fund Fragility
We show that monetary policy shocks have a positive effect on flows in bank-loan mutual funds. This relationship, however, is asymmetric: positive shocks cause small inflows, whereas negative shocks cause large outflows. Further, the effect of monetary policy shocks is stronger when short-term rates are higher. Finally, we document that large outflows from loan funds lead to significant declines in loan-level prices in the secondary leveraged loan market. Our results identify a novel channel of monetary policy transmission that not only affects a critical segment of the credit sector, but ...
Report
Unintended Consequences of "Mandatory" Flood Insurance
We document that the quasi-mandatory U.S. flood insurance program reduces mortgage lending along both the extensive and intensive margins. We measure flood insurance mandates using FEMA flood maps, focusing on the discreet updates to these maps that can be made exogenous to true underlying flood risk. Reductions in lending are most pronounced for low-income and low-FICO borrowers, implying that the effects are at least partially driven by the added financial burden of insurance. Our results are also stronger among non-local or more-distant banks, who have a diminished ability to monitor local ...
Report
The cost of bank regulatory capital
The Basel I Accord introduced a discontinuity in required capital for undrawn credit commitments. While banks had to set aside capital when they extended commitments with maturities in excess of one year, short-term commitments were not subject to a capital requirement. The Basel II Accord sought to reduce this discontinuity by extending capital standards to most short-term commitments. We use these differences in capital standards around the one-year maturity to infer the cost of bank regulatory capital. Our results show that following Basel I, undrawn fees and all-in-drawn credit spreads on ...
Working Paper
The importance of bank seniority for relationship lending
The authors examine two aspects of a bank's interaction with its borrowers--the relative priority of bank debt and the role of banks as "relationship lenders." They show that making the bank senior improves its incentives to build a relationship with the firm, thereby fulfilling an important function of intermediated debt.
Discussion Paper
Why Large Bank Failures Are So Messy and What to Do about It?
If the Lehman Brothers failure proved anything, it was that large, complex bank failures are messy; they destroy value and can destabilize financial markets. We certainly don’t mean to trivialize matters by calling large bank failures “messy,” as it their messiness, particularly the destabilizing aspect, that creates the “too-big-to-fail” problem. In our contribution to the Economic Policy Review volume, we venture an explanation about why large bank failures are so messy and discuss a policy that can make them less so.