Working Papers 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 – 2022 |
|---|
Bank Specialization and the Design of Loan Contracts FDIC Center for Financial Research Working Paper No. 2022-14 This paper was part of the 20th Annual Bank Research Conference Poster Session and was an invited submission to the CFR Working Paper Series. This Version: November 2022 Abstract We study bank specialization in lending in the U.S. corporate loan market. We document that banks specialize in lending to specific industries. Specialization is persistent over time and common across industries. Using detailed information on syndicated loans, we show that the typical loan contract between a bank specialized in an industry and a firm in the same industry has less restrictive financial covenants and no higher spreads. These results are not explained by relationship lending, high industry market shares, or geographical proximity, and are robust to using default shocks on lenders’ loan portfolios as a source of variation in banks’ self-assessment of screening abilities. Overall, our evidence suggests that banks specialize in lending because of information advantages in monitoring specific industries. Furthermore, the laxer contract terms offered by specialized banks could provide an explanation for recent evidence that firms cannot easily substitute credit granted by specialized banks. JEL Code: L15, L22, G21, G30, G32. |
The Effect of Job Loss on Bank Account Ownership FDIC Center for Financial Research Working Paper No. 2022-13 This Version: September 2022 Abstract We estimate the effect of job loss on households’ bank account ownership using a novel assembly of data: FDIC-sponsored biennial supplements to the Current Population Survey (CPS), linked to respondents’ work history in surrounding months constructed from the basic monthly CPS. We leverage differences in the timing of unemployment spells across respondents to plausibly identify the effect of job loss. Our estimates indicate the effects of job loss are quite large in magnitude. For example, households that experienced a job loss in the months leading up to the FDIC survey are about 18 percentage points more likely to be unbanked than households that lost a job in the subsequent year. This effect is roughly three-quarters of the sample mean unbanked rate among the lower-income, renter households that we study. Job loss also leads to increased use of other transaction products and services that might substitute for a bank account, including prepaid cards, check cashing, and money orders. |
Do Municipalities Pay More to Issue Unrated Bonds? FDIC Center for Financial Research Working Paper No. 2022-12 This Version: September 2022 Abstract Approximately 34% of local municipal bond issues were issued without ratings during 1998 to 2017. We study the circumstances that affect the decision to obtain a rating and whether unrated bonds, controlling for observable risk factors, are more expensive to issue than rated bonds. Results show that issuers are less likely to obtain ratings for smaller issues, negotiated offerings, and bonds with high proxies for risk such as coming from areas with low personal income. We estimate the effect of forgoing a rating on offering yields using a doubly-robust Inverse Probability Weighted Regression Adjustment that controls for confounding that arises from risk and other characteristics affecting both the choice to obtain a rating and the yield. We separately analyze revenue bonds, general obligation bonds, bank qualified, and not bank qualified bonds and find ratings decrease offering yields by 47, 49, 60, and 42 basis points respectively. The higher offering yields cost municipalities $22.5B in higher interest expense during our sample period. We find the choice of issuers to forgo ratings despite the substantial potential savings appears to be influenced by the dual underwriters who also work as advisors to the issuer. These underwriters benefit from not obtaining a rating because it lowers the price investors are willing to pay from the bond, but also lowers the price the underwriter must pay the issuer and thus increases the underwriter’s profit. |
Quick on the Draw: Liquidity Risk Mitigation in Failing Banks FDIC Center for Financial Research Working Paper No. 2022-11 This Version: October 2023 Abstract We study how banks limit their exposure to liquidity risk during financial stress by eliminating consumer access to cancelable credit lines. Using a proprietary set of transaction-level HELOC data from eight banks, we find that banks are more likely to revoke credit lines that exhibit potentially problematic characteristics at-origination and time-varying borrower “early warning signals” of risk. In the three months before each bank’s failure date, when bank capital and liquidity constraints increase, we find that banks respond to these same borrower and loan characteristics more aggressively, while borrowers do not increase HELOC drawdown rates. Before the bank becomes distressed, we find that existing borrower relationships have no adverse effects on banks’ decision to revoke credit. As failure approaches, however, banks are more likely to cut the HELOCs of borrowers with greater ability to demand liquidity from the bank, suggesting that lending relationships do not benefit borrowers during times of bank stress. Overall, we shed light on how banks manage their liquidity risk during times of idiosyncratic stress. Furthermore, while the bulk of the relationship banking literature has found that borrowers benefit from relationships during times of borrower distress, we show that relationships may harm borrowers during times of bank distress. JEL Code: G21, G51, G01, G33 |
The Procyclicality of FDIC Deposit Insurance Premiums FDIC Center for Financial Research Working Paper No. 2022-10 This Version: November 2023 Abstract We examine the procyclical effect of FDIC insurance premiums by exploiting unique changes to premium rate schedules set by regulatory agencies during the financial crisis. Using confidential FDIC data on bank risk to remove the effect of premium changes driven by bank endogenous factors, we examine the effect of changes in deposit insurance premiums that are plausibly exogenous to the performance of an individual bank. Using credit unions as a control group, which are not subject to the same deposit insurance premium regulations as banks, we document empirically a significant procyclical effect of deposit insurance premiums on bank lending during the crisis and show that community banks are disproportionately affected by this mechanism. Keywords: FDIC, Deposit Insurance, Procyclicality |
Bank Monitoring with On-Site Inspections FDIC Center for Financial Research Working Paper No. 2022-09 This version: July 2023 Abstract While theoretical papers have emphasized the importance of bank loan monitoring, empirical papers have struggled to validate these theories, largely due to limited data availability. Using a proprietary transaction-level database of nearly 30,000 multiple-draw construction loans, we empirically examine the determinants and effects of bank monitoring through on-site inspections. Consistent with theoretical predictions, banks trade off monitoring with favorable origination terms. Monitoring is less frequent when the bank has a prior relationship with the borrower, suggesting information transfers across projects. Monitoring intensity increases when local economic conditions or bank health deteriorate. Textual analysis shows that negative inspection reports are associated with a greater likelihood of banks denying draw requests, indicating that the information collected through monitoring is important for decision-making. Finally, we provide a comprehensive analysis of construction loan default and show that monitoring decreases default. Overall, our results validate the predictions of a large theoretical literature emphasizing the important role of bank monitoring. JEL Code: G21, G51, G01, G33 |
Redeploying Dirty Assets: The Impact of Environmental Liability FDIC Center for Financial Research Working Paper No. 2022-08 This Version: August 2023 Abstract This paper investigates the economic and environmental implications of limiting purchaser liability for past pollution. My empirical setting is the passage of the Brownfields Act, a reform aimed at increasing the liquidity of industrial plants by strengthening liability protection for purchasers. Using a difference-in-difference framework and detailed plant-level data, I find that reducing purchaser liability improves the liquidity treated property. Furthermore, the reform led to a 12 percent decrease in pollution, with distressed firms driving the reduction. The findings indicate that strengthening liability protection for purchasers alleviates the harm-shifting motives associated with financial distress. JEL Code: G21, G34, M14, Q50 |
Does Banking Competition Really Increase Credit for All? The Effect of Bank Branching Deregulation on Small Business Credit FDIC Center for Financial Research Working Paper No. 2022-07 This Version: June 2022 Abstract In this paper, I quantify the extent to which financial constraints limit the scope of activity of small firms, influence their labor decisions, and impact their ultimate survival. Using the U.S. branching deregulation from the 1990s, I document that local markets within deregulated states experienced an increase in their number of branches, driven by the entry of larger out-of-state banks and a decrease in the number of branches of existing local banks. As a result, small businesses were affected disproportionally. On average, in the treated markets, the overall lending to small businesses initially declined by 5.4% and remained lower for several years. The decline in credit supply eventually led to a decrease in the number of small businesses; however, many firms were able to stay in operation by decreasing their demand for labor. Specifically, there was an immediate decline in the employment and hours worked at small firms in newly deregulated markets, and even as small business lending recovered, these levels remained depressed for many years after that. Overall, the results demonstrate the critical dependence of small businesses on relationship lending by local banks and show how temporary negative credit supply shocks can have persistent adverse effects on labor. JEL Code: G21, G28, G33, J23 |
Bank Concentration and Monetary Policy Pass-Through FDIC Center for Financial Research Working Paper No. 2022-06 This Version: June 2022 Abstract This paper analyzes the implications of the recent rise in bank concentration for the transmission of monetary policy. First, I use branch-level data on deposit and loan rates to evaluate the monetary policy pass-through conditional on the level of local bank concentration and bank capitalization. I find that banks operating in high-concentration markets and under-capitalized banks adjust short-term lending rates more, particularly when the policy rate increases. Second, I build a theoretical model with heterogeneous banks that rationalizes the empirical findings and explains the underlying mechanism. In the model, monopolistic competition in local deposit and loan markets along with bank capital requirements impose frictions on the pass-through to the real economy. Counterfactual analyses highlight that the rise in bank concentration strengthens monetary policy pass-through by two channels: the market power and capital allocation channel. Both channels further enhance monetary policy transmission to output and investment, amplify the credit cycle, and flatten the Phillips curve. JEL Code: E44, E51, E52, G21 |
Did Minority Applicants Experience Worse Lending Outcomes in the Mortgage Market? A Study Using 2020 Expanded HMDA Data FDIC Center for Financial Research Working Paper No. 2022-05 This Version: June 2022 Abstract Before 2018, Home Mortgage Disclosure Act (HMDA) data did not include credit factors, such as credit score, debt-to-income ratio, or loan-to-value ratio, typically used by lenders to make loan decisions. HMDA data also did not include important pricing information, such as discount points and lender credits. Starting in 2018, qualifying lenders report these variables, which allow researchers to account for differences in credit risk when modeling mortgage underwriting and loan pricing. In addition, several new variables (final interest rate, total loan costs, discount points paid, and lender credits) allow researchers to study the simultaneous determinants of mortgage pricing. Using 2020 HMDA data, this paper finds that group-level differences persist between minority applicants and non-Hispanic White borrowers in both underwriting and pricing outcomes after accounting for credit risk factors available in HMDA data. Further, group-level differences are generally higher for borrowers in lower credit score ranges for conventional purchase and conventional refinance lending. JEL Code: G21, G28, R51 |
Analysis of Upstream, Downstream & Common Firm Shocks Using a Large Factor-Augmented Vector Autoregressive Approach FDIC Center for Financial Research Working Paper No. 2022-04 This Version: May 2024 Abstract We evaluate the roles of upstream (supplier-to-user), downstream (user-to-supplier) and common factor shock transmission across firms by deriving inter-firm networks and common factors from U.S. equities over 1989-2017. We overcome the econometric challenges of estimating the large factor-augmented vector autoregressive (FAVAR) system by developing two alternative approaches: one prioritizing computational efficiency and the other providing the full posterior distribution of all model parameters and factors. We find that: (i) common factors drive an increasing variance share of returns; (ii) supplier shocks are more evident in equity price movements than downstream exposures; (iii) removing the impact of common factors is increasingly important for revealing inter-firm connections. JEL Code: C11, C33, C55, E44 |
Back to the Real Economy: The Effects of Risk Mispricing on the Term Premium and Bank Lending FDIC Center for Financial Research Working Paper No. 2022-03 This Version: August 2023 Abstract Bond markets can plummet or rally on the back of sentiment-driven reactions which are unrelated to fundamentals. Therefore, changes in bond prices can not only be interpreted as reflecting risk but also mispricing of long-term assets. These perceived risks can often feed back into the economy by affecting the supply of credit. We construct a DSGE model with heterogeneous banks, asset pricing rules that generate a time-varying term premium, and introduce bond risk mispricing shocks to study their effects on the real economy. A risk mispricing shock, in which agents overprice perceived risk, increases the term premium and lowers output by reducing the availability of credit, as banks increase rates and tighten lending standards. However, when investors underprice risk, a compressed term premium leads to a `bad' credit boom that results in a more severe recession once the snapback occurs. JEL Code: E43, E44, E58, G12 |
Can Banks Lend Like Fintechs? Technology, PPP, and the COVID-19 Pandemic FDIC Center for Financial Research Working Paper No. 2022-02 This Version: August 2023 Abstract Using granular data, we describe the dimensions along which bank technologies differ from fintech competitors and construct a novel measure of a bank’s technology based upon its technology overlap with fintech firms. We show that a one standard deviation increase in our financial technology measure is associated with an 8.7 percentage point increase in transaction-based loans associated with the Paycheck Protection Program (PPP) in 2020Q2. Technology enables banks to originate outside of their branch market area and in less concen- trated geographies, but does not crowd out in-market lending that is more associated with a physical presence. In a difference-in-differences analysis, we show an outsized increase in small business lending growth in 2020 for mid-sized high tech banks relative to their peers. JEL Code: G21, G23, O3 |
The Long-Run Effects of Losing Failed Bank Auctions FDIC Center for Financial Research Working Paper No. 2022-01 This Version: January 2022 Abstract Using a proprietary database of failed bank auction participants, I examine whether acquiring a failed bank creates shareholder value by using the losers’ post-acquisition performance as a counterfactual. While the market responds favorably to all failed bank acquisition announcements, in the three years post-acquisition, acquirers with Shared-Loss Agreements (SLAs), where the FDIC absorbs approximately 80% of losses, realize abnormal returns that are 19.8% lower than auction losers. Inconsistent with the effects of a winner’s curse, abnormal returns are not related to bidder competition. However, acquirers with SLAs have less lending risk than both failed bank auction losers and winners without SLAs, suggesting that the reduction in risk stemming from SLAs plays a role in explaining the divergence in long-run abnormal returns. JEL Code: G01, G14, G21, G28, D44 |
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.