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| Working Papers – 2021 |
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Refinancing Inequality During the COVID-19 Pandemic FDIC Center for Financial Research Working Paper No. 2021-08 This Version: February 2023 Abstract During the first half of 2020, the difference in savings from mortgage refinancing between high- and low-income borrowers was ten times higher than before. This was the result of two factors: high-income borrowers increased their refinancing activity more than otherwise comparable low-income borrowers and, conditional on refinancing, they captured slightly larger improvements in interest rates. Refinancing inequality increases with the severity of the COVID-19 pandemic and is characterized by an under- representation of low-income borrowers in the pool of applications. We estimate a difference of $5 billion in savings between the top income quintile and the rest of the market. Keywords: Mortgage Refinancing, COVID-19, Wealth Inequality, Monetary Policy |
Determinants of Losses on Construction Loans: Bad Loans, Bad Banks, or Bad Markets? FDIC Center for Financial Research Working Paper No. 2021-07 This Version: August 2021 Abstract Construction loan portfolios have experienced notoriously high loss rates during economic downturns and are a key factor in many bank failures. Yet there has been little research on what drives losses on construction loans and how to mitigate those losses, due to a lack of data. Using proprietary loan-level data from more than 15,000 defaulted construction loans at over 275 banks that failed between 2008 and 2013, we explore the extent to which observed losses during a severe downturn are driven by the characteristics of the loans, the originating banks, and the local markets. We find close ties between loss rates and certain loan characteristics as well as market conditions both at and after origination, while institution-level differences across banks appear less important. We find that the risk of higher losses on construction loans is influenced not only by the originating bank’s behavior but also by the behavior of other local lenders in the market. This finding has important implications for how lenders and regulators manage risk through the real estate cycle. We also find support for existing regulatory guidance regarding higher capital requirements for construction loans, specifically for land and lot development loans. JEL Code: R31, R33, G21 |
Capital Controls, Domestic Macroprudential Policy and the Bank Lending Channel of Monetary Policy FDIC Center for Financial Research Working Paper No. 2021-06 This Version: May 2021 Abstract We study how capital controls and domestic macroprudential policy tame credit supply booms, respectively targeting foreign and domestic bank debt. For identification, we exploit the simultaneous introduction of capital controls on foreign exchange (FX) debt inflows and an increase of reserve requirements on domestic bank deposits in Colombia during a strong credit boom, as well as credit registry and bank balance sheet data. Our results suggest that first, an increase in the local monetary policy rate, raising the interest rate spread with the United States, allows more FX-indebted banks to carry trade cheap FX funds with more expensive peso lending, especially toward riskier, opaque firms. Capital controls tax FX debt and break the carry trade. Second, the increase in reserve requirements on domestic deposits directly reduces credit supply, and more so for riskier, opaque firms, rather than enhances the transmission of monetary rates on credit supply. Importantly, different banks finance credit in the boom with either domestic or foreign (FX) financing. Hence, capital controls and domestic macroprudential policy complementarily mitigate the boom and the associated risk-taking through two distinct channels. JEL Code: E52, E58, F34, F38, G21, G28 |
Kansas’ Experiment with Private Deposit Insurance FDIC Center for Financial Research Working Paper No. 2021-05 This Version: April 2021 Abstract Between 1909 and 1922 a private deposit insurance company coexisted with the state-sponsored deposit insurance program in Kansas. This paper documents its development using primary sources. In addition, it examines if affiliation with the private deposit insurance (i) had an effect on risk-taking and the probability of failure; (ii) increased confidence among depositors, and (iii) was influenced by a neighboring bank’s membership in the state’s deposit insurance. We find that affiliation with the private deposit insurance did not affect a bank’s likelihood of failure, although smaller national bank members did increase risk-taking. The evidence does not support the hypothesis that the company enhanced depositor confidence. Lastly, we do find strong evidence that a bank’s decision to join the private deposit insurance was influenced by neighboring banks’ affiliation with the Kansas deposit insurance program. JEL Code: G21, G22, N21, N22 |
Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis FDIC Center for Financial Research Working Paper No. 2021-04 This Version: April 2021 Abstract We investigate the role of private equity (PE) in the resolution of failed banks after the 2008 financial crisis. Using proprietary failed bank acquisition data from the FDIC combined with data on PE investors, wefind that PE investors made substantial investments in underperforming and riskier failed banks. Further, these acquisitions tended to be in geographies where the other local banks were also distressed. Our results suggest that PE investors helped channel capital to underperforming failed banks when the “natural” potential bank acquirers were themselves constrained, filling the gap created by a weak, undercapitalized banking sector. Next, we use a quasi-random empirical design based on proprietary bidding data to examine ex post performance and real effects. We find that PE-acquired banks performed better ex post, with positive real effects for the local economy. Our results suggest that private equity investors had a positive role in stabilizing the financial system in the crisis through their involvement in failed bank resolution. JEL Code: E65, G18, G21 |
Estimation of Discrete Choice Network Models with Missing Outcome Data FDIC Center for Financial Research Working Paper No. 2021-03 This Version: April 2022 Abstract This paper studies the problem of missing observations on the outcome variable in a discrete choice network model. The research question is motivated by an empirical study of the spillover effect of home mortgage delinquencies, where mortgage repayment decisions can only be observed for a sample of all the borrowers in the study region. We show that the nested pseudo-likelihood (NPL) algorithm can be readily modified to address this missing data problem. Monte Carlo simulations indicate that the proposed estimator works well infinite samples and ignoring this issue leads to a severe downward bias in the estimated spillover effect. We apply the proposed estimation procedure using data on single-family residential mortgage delinquencies in Clark County of Nevada in 2010, and find strong evidence of the spillover effect. We also conduct some counterfactual experiments to illustrate the importance of consistently estimating the spillover effect in policy evaluation. JEL Code: C21, R31 |
Reallocating Liquidity to Resolve a Crisis: Evidence from the Panic of 1873 FDIC Center for Financial Research Working Paper No. 2021-02 This Version: May 2021 Abstract We study financial stability with constraints on central bank intervention. We show that a forced reallocation of liquidity across banks can achieve fewer bank failures than a decentralized market for interbank loans, reflecting a pecuniary externality in the decentralized equilibrium. Importantly, this reallocation can be implemented through the issuance of clearinghouse loan certificates, such as those issued in New York City during the Panic of 1873. With a new dataset constructed from archival records, we demonstrate that the New York Clearinghouse issued loan certificates to member banks in the way our model suggests would have helped resolve the panic. JEL Code: D53, D62, E42, E50, G01, N21 |
Small Bank Financing and Funding Hesitancy in a Crisis: Evidence from the Paycheck Protection Program FDIC Center for Financial Research Working Paper No. 2021-01 Video: PPP Loans and Credit Access for Small Firms This Version: September 2021 Abstract We study the delivery of subsidized financing to small firms through the Paycheck Protection Program (PPP). Smaller firms are less likely to gain early PPP access, an effect attenuated in small banks and firms with prior lending relationships. Their more even treatment offers a new rationale, beyond traditional soft information arguments, for why small businesses pair with small banks. We also detect a “funding hesitancy” in PPP uptake by small businesses, partly reflecting their wariness of the extensive, subjective government powers to investigate PPP recipients. We discuss the implications of the results for research and policies on small business financing. JEL Code: G32, G38, H81, E61 |
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.