Consumer Defaults and Social Capital
Brian Clark, Iftekhar Hasan, Helen Lai, Feng Li, Akhtar Siddique
Journal of Financial Stability,
April
2021
Abstract
Using account level data from a credit bureau, we study the role that social capital plays in consumer default decisions. We find that borrowers in communities with greater social capital are significantly less likely to default on loans, even after adjusting for different levels of income and other characteristics such as credit scores. The results are strongest for potentially strategic defaults on mortgages; a one standard deviation increase in social capital reduces such defaults by 12.4 %. These results can be generalized to any mortgage default. Our results also indicate that the effect of social capital is most prominent among more creditworthy borrowers, suggesting that when given a choice, the social cost of defaulting is an important factor affecting default decisions. We find a similar impact of social capital on consumer defaults in other datasets with more detailed information on borrowers as well. Our results are robust to modeling and methodology choices, as well as controlling for other drivers of default such as wealth, income and amenities from homeownership. Our results suggest that increasing social capital via measures to build community cohesion such as promotion of owner-occupied home ownership may be one avenue to deter consumer default.
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Real Estate Transaction Taxes and Credit Supply
Michael Koetter, Philipp Marek, Antonios Mavropoulos
Deutsche Bundesbank Discussion Paper,
No. 4,
2021
Abstract
We exploit staggered real estate transaction tax (RETT) hikes across German states to identify the effect of house price changes on mortgage credit supply. Based on approximately 33 million real estate online listings, we construct a quarterly hedonic house price index (HPI) between 2008:q1 and 2017:q4, which we instrument with state-speci c RETT changes to isolate the effect on mortgage credit supply by all local German banks. First, a RETT hike by one percentage point reduces HPI by 1.2%. This effect is driven by listings in rural regions. Second, a 1% contraction of HPI induced by an increase in the RETT leads to a 1.4% decline in mortgage lending. This transmission of fiscal policy to mortgage credit supply is effective across almost the entire bank capitalization distribution.
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A Note of Caution on Quantifying Banks' Recapitalization Effects
Felix Noth, Kirsten Schmidt, Lena Tonzer
Abstract
Unconventional monetary policy measures like asset purchase programs aim to reduce certain securities' yield and alter financial institutions' investment behavior. These measures increase the institutions' market value of securities and add to their equity positions. We show that the extent of this recapitalization effect crucially depends on the securities' accounting and valuation methods, country-level regulation, and maturity structure. We argue that future research needs to consider these factors when quantifying banks' recapitalization effects and consequent changes in banks' lending decisions to the real sector.
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The Real Impact of Ratings-based Capital Rules on the Finance-Growth Nexus
Iftekhar Hasan, Gazi Hassan, Suk-Joong Kim, Eliza Wu
International Review of Financial Analysis,
January
2021
Abstract
We investigate whether ratings-based capital regulation has affected the finance-growth nexus via a foreign credit channel. Using quarterly data on short to medium term real GDP growth and cross-border bank lending flows from G-10 countries to 67 recipient countries, we find that since the implementation of Basel 2 capital rules, risk weight reductions mapped to sovereign credit rating upgrades have stimulated short-term economic growth in investment grade recipients but hampered growth in non-investment grade recipients. The impact of these rating upgrades is strongest in the first year and then reverses from the third year and onwards. On the other hand, there is a consistent and lasting negative impact of risk weight increases due to rating downgrades across all recipient countries. The adverse effects of ratings-based capital regulation on foreign bank credit supply and economic growth are compounded in countries with more corruption and less competitive banking sectors and are attenuated with greater political stability.
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Financial Linkages and Sectoral Business Cycle Synchronisation: Evidence from Europe
Hannes Böhm, Julia Schaumburg, Lena Tonzer
Abstract
We analyse whether financial integration between countries leads to converging or diverging business cycles using a dynamic spatial model. Our model allows for contemporaneous spillovers of shocks to GDP growth between countries that are financially integrated and delivers a scalar measure of the spillover intensity at each point in time. For a financial network of ten European countries from 1996-2017, we find that the spillover effects are positive on average but much larger during periods of financial stress, pointing towards stronger business cycle synchronisation. Dismantling GDP growth into value added growth of ten major industries, we observe that some sectors are strongly affected by positive spillovers (wholesale & retail trade, industrial production), others only to a weaker degree (agriculture, construction, finance), while more nationally influenced industries show no evidence for significant spillover effects (public administration, arts & entertainment, real estate).
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Spillovers of Asset Purchases Within the Real Sector: Win-Win or Joy and Sorrow?
Talina Sondershaus
IWH Discussion Papers,
No. 22,
2019
Abstract
Events which have an adverse or positive effect on some firms can disseminate through the economy to firms which are not directly affected. By exploiting the first large sovereign bond purchase programme of the ECB, this paper investigates whether more lending to some firms spill over to firms in the surroundings of direct beneficiaries. Firms operating in the same industry and region invest less and reduce employment. The paper shows the importance to consider spillover effects when assessing unconventional monetary policies: Differences between treatment and control groups can be entirely attributed to negative effects on the control group.
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A Capital Structure Channel of Monetary Policy
Benjamin Grosse-Rueschkamp, Sascha Steffen, Daniel Streitz
Journal of Financial Economics,
No. 2,
2019
Abstract
We study the transmission channels from central banks’ quantitative easing programs via the banking sector when central banks start purchasing corporate bonds. We find evidence consistent with a “capital structure channel” of monetary policy. The announcement of central bank purchases reduces the bond yields of firms whose bonds are eligible for central bank purchases. These firms substitute bank term loans with bond debt, thereby relaxing banks’ lending constraints: banks with low tier-1 ratios and high nonperforming loans increase lending to private (and profitable) firms, which experience a growth in investment. The credit reallocation increases banks’ risk-taking in corporate credit.
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Gute Absicht – böses Ende: Die US-Wohnungspolitik als Brandbeschleuniger der Weltfinanzkrise
Reint E. Gropp, Vahid Saadi
Wirtschaft im Wandel,
No. 1,
2019
Abstract
Der Boom auf dem US-amerikanischen Eigenheimmarkt in den frühen 2000er Jahren führte zur schwersten Finanzkrise der vergangenen Jahrzehnte. Wissenschaftler haben unterschiedliche Faktoren dokumentiert, die zum rasanten Anstieg der Immobilienpreise beigetragen haben. Kaum beleuchtet wurde bisher die Rolle der US-Wohnungspolitik, insbesondere die Förderung des privaten Wohneigentums durch den Community Reinvestment Act (CRA). Der vorliegende Beitrag untersucht die Geschichte dieses Bundesgesetzes und seine Auswirkungen auf den Markt für Hypotheken und Wohneigentum seit den späten 1990er Jahren. Infolge des CRA wurden seit 1998 deutlich mehr Hypotheken aufgenommen. Der Anstieg der Immobilienpreise in der Boomphase beruhte zum Teil auf diesem politisch induzierten Anstieg der Hypothekenvergabe. Der CRA ermöglichte es auch Kreditnehmern mit geringerer Kreditwürdigkeit, eine Hypothek aufzunehmen – in der Folge kam es zu vermehrten Zahlungsausfällen. Der CRA hat also zum Boom-Bust-Zyklus auf dem amerikanischen Immobilienmarkt beigetragen. Er kann als Beispiel einer wohlmeinenden Politik gelten, die unbeabsichtigt wohlfahrtsmindernde Wirkungen zeitigt.
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Banks Response to Higher Capital Requirements: Evidence from a Quasi-natural Experiment
Reint E. Gropp, Thomas Mosk, Steven Ongena, Carlo Wix
Review of Financial Studies,
No. 1,
2019
Abstract
We study the impact of higher capital requirements on banks’ balance sheets and their transmission to the real economy. The 2011 EBA capital exercise is an almost ideal quasi-natural experiment to identify this impact with a difference-in-differences matching estimator. We find that treated banks increase their capital ratios by reducing their risk-weighted assets, not by raising their levels of equity, consistent with debt overhang. Banks reduce lending to corporate and retail customers, resulting in lower asset, investment, and sales growth for firms obtaining a larger share of their bank credit from the treated banks.
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May the Force Be with You: Exit Barriers, Governance Shocks, and Profitability Sclerosis in Banking
Michael Koetter, Carola Müller, Felix Noth, Benedikt Fritz
Deutsche Bundesbank Discussion Paper,
No. 49,
2018
Abstract
We test whether limited market discipline imposes exit barriers and poor profitability in banking. We exploit an exogenous shock to the governance of government-owned banks: the unification of counties. County mergers lead to enforced government-owned bank mergers. We compare forced to voluntary bank exits and show that the former cause better bank profitability and efficiency at the expense of riskier financial profiles. Regarding real effects, firms exposed to forced bank mergers borrow more at lower cost, increase investment, and exhibit higher employment. Thus, reduced exit frictions in banking seem to unleash the economic potential of both banks and firms.
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