To Securitise or to Price Credit Default Risk?
Huyen Nguyen, Danny McGowan
Abstract
We evaluate if lenders price or securitise mortgages to mitigate credit risk. Exploiting exogenous variation in regional credit risk created by differences in foreclosure law along US state borders, we find that financial institutions respond to the law in heterogeneous ways. In the agency market where Government Sponsored Enterprises (GSEs) provide implicit loan guarantees, lenders transfer credit risk using securitisation and do not price credit risk into mortgage contracts. In the non-agency market, where there is no such guarantee, lenders increase interest rates as they are unable to shift credit risk to loan purchasers. The results inform the debate about the design of loan guarantees, the common interest rate policy, and show that underpricing regional credit risk leads to an increase in the GSEs‘ debt holdings by $79.5 billion per annum, exposing taxpayers to preventable losses in the housing market.
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The Creation and Evolution of Entrepreneurial Public Markets
Shai B. Bernstein, Abhishek Dev, Josh Lerner
Journal of Financial Economics,
Nr. 2,
2020
Abstract
This paper explores the creation and evolution of new stock exchanges around the world geared toward entrepreneurial companies, known as second-tier exchanges. Using hand-collected novel data, we show the proliferation of these exchanges in many countries, their significant volume of Initial Public Offerings (IPOs), and lower listing requirements. Shareholder protection strongly predicted exchange success, even in countries with high levels of venture capital activity, patenting, and financial market development. Better shareholder protection allowed younger, less-profitable, but faster-growing, companies to raise more capital. These results highlight the importance of institutions in enabling the provision of entrepreneurial capital to young companies.
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Comparing Financial Transparency between For-profit and Nonprofit Suppliers of Public Goods: Evidence from Microfinance
John W. Goodell, Abhinav Goyal, Iftekhar Hasan
Journal of International Financial Markets, Institutions and Money,
January
2020
Abstract
Previous research finds market financing is favored over relationship financing in environments of better governance, since the transaction costs to investors of vetting asymmetric information are thereby reduced. For industries supplying public goods, for-profits rely on market financing, while nonprofits rely on relationships with donors. This suggests that for-profits will be more inclined than nonprofits to improve financial transparency. We examine the impact of for-profit versus nonprofit status on the financial transparency of firms engaged with supplying public goods. There are relatively few industries that have large number of both for-profit and nonprofit firms across countries. However, the microfinance industry provides the opportunity of a large number of both for-profit and nonprofit firms in relatively equal numbers, across a wide array of countries. Consistent with our prediction, we find that financial transparency is positively associated with a for-profit status. Results will be of broad interest both to scholars interested in the roles of transparency and transaction costs on market versus relational financing; as well as to policy makers interested in the impact of for-profit on the supply of public goods, and on the microfinance industry in particular.
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Corporate Misconduct and the Cost of Private Debt: Evidence from China
Xian Gu, Iftekhar Hasan, Haitian Lu
Comparative Economic Studies,
Nr. 3,
2019
Abstract
Using a comprehensive dataset of corporate lawsuits in China, we investigate the implications of corporate misconduct on the cost of private debt. Evidence reveals that firms involved in litigations obtain subsequent loans with stricter pricing terms, 15.1 percent higher loan spreads, than non-litigated borrowers. Strong political connection and repeated relationship help to flatten the sensitivity of loan pricing to litigation. Nonbank financial institutions react in stronger manner to corporate misconduct than traditional banks in pricing loans. Overall, we show that private debt holders care about borrowers’ wrongdoing in the past.
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What Does Peer-to-Peer Lending Evidence Say About the Risk-taking Channel of Monetary Policy?
Yiping Huang, Xiang Li, Chu Wang
Abstract
This paper uses loan application-level data from a Chinese peer-to-peer lending platform to study the risk-taking channel of monetary policy. By employing a direct ex-ante measure of risk-taking and estimating the simultaneous equations of loan approval and loan amount, we are the first to provide quantitative evidence of the impact of monetary policy on the risk-taking of nonbank financial institution. We find that the search-for-yield is the main workhorse of the risk-taking effect, while we do not observe consistent findings of risk-shifting from the liquidity change. Monetary policy easing is associated with a higher probability of granting loans to risky borrowers and a greater riskiness of credit allocation, but these changes do not necessarily relate to a larger loan amount on average.
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What Does Peer-to-Peer Lending Evidence Say About the Risk-taking Channel of Monetary Policy?
Yiping Huang, Xiang Li, Chu Wang
Abstract
This paper uses loan application-level data from a peer-to-peer lending platform to study the risk-taking channel of monetary policy. By employing a direct ex-ante measure of risk-taking and estimating the simultaneous equations of loan approval and loan amount, we are the first to provide quantitative evidence of the impact of monetary policy on the risk-taking of nonbank financial institution. We find that the search-for-yield is the main workhorse of the risk-taking effect, while we do not observe consistent findings of risk-shifting from the liquidity change. Monetary policy easing is associated with a higher probability of granting loans to risky borrowers and a greater riskiness of credit allocation, but these changes do not necessarily relate to a larger loan amount on average.
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Too Connected to Fail? Inferring Network Ties from Price Co-movements
Jakob Bosma, Michael Koetter, Michael Wedow
Journal of Business and Economic Statistics,
Nr. 1,
2019
Abstract
We use extreme value theory methods to infer conventionally unobservable connections between financial institutions from joint extreme movements in credit default swap spreads and equity returns. Estimated pairwise co-crash probabilities identify significant connections among up to 186 financial institutions prior to the crisis of 2007/2008. Financial institutions that were very central prior to the crisis were more likely to be bailed out during the crisis or receive the status of systemically important institutions. This result remains intact also after controlling for indicators of too-big-to-fail concerns, systemic, systematic, and idiosyncratic risks. Both credit default swap (CDS)-based and equity-based connections are significant predictors of bailouts. Supplementary materials for this article are available online.
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Trust in Banks
Zuzana Fungáčová, Iftekhar Hasan, Laurent Weill
Journal of Economic Behavior and Organization,
2019
Abstract
Trust in banks is considered essential for an effective financial system, yet little is known about what determines trust in banks. Only a handful of single-country studies discuss the topic, so this paper aims to fill the gap by providing a cross-country analysis on the level and determinants of trust in banks. Using World Values Survey data covering 52 countries during the period 2010–2014, we observe large cross-country differences in trust in banks and confirm the influence of several sociodemographic indicators. Our main findings include: women tend to trust banks more than men; trust in banks tends to increase with income, but decrease with age and education; and access to television enhances trust, while internet access erodes trust. Additionally, religious, political, and economic values affect trust in banks. Notably, religious individuals tend to put greater trust in banks, but differences are observed across denominations. The holding of pro-market economic views is also associated with greater trust in banks.
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Too connected to fail? Wie die Vernetzung der Banken staatliche
Rettungsmaßnahmen vorhersagen kann
Friederike Altgelt, Michael Koetter
Wirtschaft im Wandel,
Nr. 4,
2017
Abstract
Seit der globalen Finanzkrise 2007/2008 liegt aufgrund ihrer Schlüsselrolle für ein funktionierendes Finanzsystem ein besonderer Fokus auf den so genannten systemrelevanten Finanzinstitutionen (systemically important financial institutions, SIFIs). Neben der Größe von Finanzinstitutionen ist auch das Ausmaß ihrer Vernetzung im internationalen Finanzsystem entscheidend für die Klassifikation als systemrelevant. Obwohl die Vernetzung von Banken untereinander in der Regel schwer zu messen ist, kann sie aus der Entwicklung von Prämien von Kreditausfallversicherungen (den so genannten Credit Default Swap (CDS) Spreads) und Aktienrenditen abgeleitet werden. Dieser Beitrag untersucht, inwieweit sich mit Hilfe der sich daraus ergebenden Co-Crash-Probability vor der Finanzkrise vorhersagen lässt, welche Finanzinstitutionen während der Krise Teil von staatlichen Rettungsprogrammen (bailout programmes) wurden.
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Banks Credit and Productivity Growth
Fadi Hassan, Filippo di Mauro, Gianmarco Ottaviano
ECB Working Paper,
Nr. 2008,
2017
Abstract
Financial institutions are key to allocate capital to its most productive uses. In order to examine the relationship between productivity and bank credit in the context of different financial market set-ups, we introduce a model of overlapping generations of entrepreneurs under complete and incomplete credit markets. Then, we exploit firm-level data for France, Germany and Italy to explore the relation between bank credit and productivity following the main derivations of the model. We estimate an extended set of elasticities of bank credit with respect to a series of productivity measures of firms. We focus not only on the elasticity between bank credit and productivity during the same year, but also on the elasticity between credit and future realised productivity. Our estimates show a clear Eurozone core-periphery divide, the elasticities between credit and productivity estimated in France and Germany are consistent with complete markets, whereas in Italy they are consistent with incomplete markets. The implication is that in Italy firms turn to be constrained in their long-term investments and bank credit is allocated less efficiently than in France and Germany. Hence capital misallocation by banks can be a key driver of the long-standing slow productivity growth that characterises Italy and other periphery countries.
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