Does CFPB Oversight Crimp Credit?
We study how regulatory oversight by the Consumer Financial Protection Bureau (CFPB) affects mortgage credit supply and other aspects of bank behavior. We use a difference-in-differences approach exploiting changes in regulatory intensity and a size cutoff below which banks are exempt from CFPB scrutiny. CFPB oversight leads to a reduction in lending in the Federal Housing Administration (FHA) market, which primarily serves riskier borrowers. However, it is also associated with a lower transition probability from moderate to serious delinquency, suggesting that tighter regulatory oversight ...
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 ...
Import competition and household debt
We analyze the effect of import competition on household balance sheets from 2000 to 2007 using individual data on consumer finances. We exploit variation in exposure to foreign competition using industry-level shipping costs and initial differences in regions? industry specialization. We show that household debt increased significantly in regions where manufacturing industries are more exposed to import competition. A one standard deviation increase in exposure to import competition explains 30 percent of the cross-regional variation in household leverage growth, and is mostly driven by home ...
The Banking Industry and COVID-19: Lifeline or Life Support?
By many measures the U.S. banking industry entered 2020 in good health. But the widespread outbreak of the COVID-19 virus and the associated economic disruptions have caused unemployment to skyrocket and many businesses to suspend or significantly reduce operations. In this post, we consider the implications of the pandemic for the stability of the banking sector, including the potential impact of dividend suspensions on bank capital ratios and the use of banks’ regulatory capital buffers.
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 ...
Did the Supervisory Guidance on Leveraged Lending Work?
Financial regulatory agencies issued guidance intended to curtail leveraged lending?loans to firms perceived to be risky?in March of 2013. In issuing the guidance, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation highlighted several facts that were reminiscent of the mortgage market in the years preceding the financial crisis: rapid growth in the volume of leveraged lending, increased participation by unregulated investors, and deteriorating underwriting standards. Our post shows that banks, in ...
The Cost of Regulatory Capital
Banks contend that equity capital is expensive and that an increase in capital requirements will adversely impact bank services, including the volume and cost of mortgages and corporate loans. For example, JPMorgan CEO Jamie Dimon said in 2017 that ?It is clear that the banks have too much capital?and more of that capital can be safely used to finance the economy.? In a recent staff report, we compare the different treatments of short-term credit commitments under the Basel I and Basel II Accords to assess the effect of capital regulation on banks? cost of capital.
Supervising large, complex financial institutions: what do supervisors do?
The supervision of large, complex financial institutions is one of the most important, but least understood, activities of the Federal Reserve. Supervision entails monitoring and oversight to assess whether firms are engaged in unsafe or unsound practices, and to ensure that firms take appropriate action to correct such practices. It is distinct from regulation, which involves the development and promulgation of the rules under which firms operate. This article brings greater transparency to the Federal Reserve?s supervisory activities by considering how they are structured, staffed, and ...
Who Pays What First? Debt Prioritization during the COVID Pandemic
Since the depths of the Great Recession, household debt has increased from a low of $11 trillion in 2013 to more than $14 trillion in 2020 (see the New York Fed Household Debt and Credit Report). In this post, we examine how consumers’ repayment priorities have evolved over that time. Specifically, we seek to answer the following question: When consumers repay some but not all of their loans, which types do they choose to keep paying and which do they fall behind on?
Buyout activity: the impact of aggregate discount rates
Buyout booms form in response to declines in the aggregate risk premium. We document that the equity risk premium is the primary determinant of buyout activity rather than credit-specific conditions. We articulate a simple explanation for this phenomenon: a low risk premium increases the present value of performance gains and decreases the cost of holding an illiquid investment. A panel of U.S. buyouts confirms this view. The risk premium shapes changes in buyout characteristics over the cycle, including their riskiness, leverage, and performance. Our results underscore the importance of the ...