Working Papers are presented as PDF files on this page reference Portable Document Format (PDF) files. Adobe Acrobat, a reader available for free on the Internet, is required to display or print PDF files. (PDF Help)
| Working Papers – 2018 |
|---|
Reducing Moral Hazard at the Expense of Market Discipline: The Effectiveness of Double Liability Before and During the Great Depression FDIC Center for Financial Research Working Paper No. 2018-05 This Version: September 2018 Abstract Prior to the Great Depression, regulators imposed double liability on bank shareholders to ensure financial stability and protect depositors. Under double liability, shareholders of failing banks lost their initial investment and had to pay up to the par value of the stock in order to compensate depositors. We examine whether double liability was effective at mitigating bank risks and providing a safety net for depositors before and during the Great Depression. We first develop a model that demonstrates two competing effects of double liability: a direct effect that constrains bank risk-taking due to increased skin in the game, and an indirect effect that promotes risk-taking due to weaker monitoring by better-protected depositors. We then test the model’s predictions using a novel identification strategy that compares state Federal Reserve member banks and national banks in New York and New Jersey. We find no evidence that double liability reduced bank risk prior to the Great Depression, but do find evidence that deposits in double-liability banks were stickier and less susceptible to runs during the Great Depression. Our findings suggest that the banking system was inherently fragile under double liability because of the conflict between shareholder incentive alignment and depositor market discipline; the depositor protection feature of double liability reduced the threat of funding outflows but may have undermined its effectiveness as a regulatory tool for reducing bank risk. JEL Codes: G21, G28, N22 |
On the Rise of FinTechs: Credit Scoring using Digital Footprints FDIC Center for Financial Research Working Paper No. 2018-04 This Version: July 2018 Published as: Berg, Tobias, Valentin Burg, Ana Gombović, and Manju Puri. “On the Rise of FinTechs: Credit Scoring Using Digital Footprints.” The Review of Financial Studies 33, no. 7 (2020): 2845-2897. Abstract We analyze the information content of the digital footprint – information that people leave online simply by accessing or registering on a website – for predicting consumer default. Using more than 250,000 observations, we show that even simple, easily accessible variables from the digital footprint equal or exceed the information content of credit bureau scores. Furthermore, the discriminatory power for unscorable customers is very similar to that of scorable customers. Our results have potentially wide implications for financial intermediaries’ business models, for access to credit for the unbanked, and for the behavior of consumers, firms, and regulators in the digital sphere. |
Modeling Loss Given Default FDIC Center for Financial Research Working Paper No. 2018-03 This Version: July 2018 Abstract We investigate the puzzle in the literature that various parametric loss given default (LGD) statistical models perform similarly by comparing their performance in a simulation framework. We find that, even using the full set of explanatory variables from the assumed data generating process, these models still show similar poor performance in terms of predictive accuracy and rank ordering when mean predictions and squared error loss functions are used. Therefore, the findings in the literature that predictive accuracy and rank ordering cluster in a very narrow range across different parametric models are robust. We argue, however, that predicted distributions as well as the models’ ability to accurately capture marginal effects are also important performance metrics for capital models and stress testing. We find that the sophisticated parametric models that are specifically designed to address the bi-modal distributions of LGD outperform the less sophisticated models by a large margin in terms of predicted distributions. Also, we find that stress testing poses a challenge to all LGD models because of limited data and relevant explanatory variable availability, and that model selection criteria based on goodness of fit may not serve the stress testing purpose well. Finally, the evidence here suggests that we do not need to use the most sophisticated parametric methods to model LGD. JEL Codes: G21, G28 |
Deposit Inflows and Outflows in Failing Banks: The Role of Deposit Insurance FDIC Center for Financial Research Working Paper No. 2018-02 This Version: July 2022 Abstract Using unique, daily, account-level balances data we investigate the drivers of deposit outflows and inflows in a distressed bank. We observe an outflow of uninsured depositors from the bank following bad regulatory news. Both regular and temporary deposit insurance measures reduce the outflow of deposits. We provide important new evidence that, simultaneous with deposit outflows, deposit inflows are large and of first-order impact — a result which is missed when looking at aggregated deposit data alone. Outflows of uninsured deposits were largely offset with inflows of new insured deposits as the bank approached failure, with the bank increasing term deposit interest rates. We show this phenomenon holds more generally in a large sample of banks that faced regulatory action. Our results suggest that inflows into insured deposits are an important mechanism that weakens depositor discipline. JEL Codes: G21, G28, D12, G01 |
Banks’ Nonbank Affiliations FDIC Center for Financial Research Working Paper No. 2018-01 This Version: January 2018 Abstract We highlight the pressures nonbank affiliates create on banks within the same bank holding company (BHC). In a simple model, BHCs reallocate capital from the bank to the nonbank through internal dividends when banks have lower cost of funds and nonbanks benefit from lesser regulation. We use the timing of the passage of the Gramm Leach Bliley Act in 1999, which removed restrictions on BHC affiliation with nonbanks as an exogenous shock. Consistent with model predictions, a difference-in-differences analysis shows that BHCs funded expansion into lesser regulated investment banking through internal bank dividends, but did not for more regulated insurance-underwriting. JEL Codes: D29, G21, G23, G28, G34, G35, L25 |
The Center for Financial Research (CFR) Working Paper Series allows CFR staff and their coauthors to circulate preliminary research findings to stimulate discussion and critical comment. Views and opinions expressed in CFR Working Papers reflect those of the authors and do not necessarily reflect those of the FDIC or the United States. Comments and suggestions are welcome and should be directed to the authors. References should cite this research as a “FDIC CFR Working Paper” and should note that findings and conclusions in working papers may be preliminary and subject to revision.