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  2. ASSA Annual Meeting
  3. 2021
  4. Preliminary Program
  5. Fraud and Relationships (in Banking and Finance)
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Fraud and Relationships (in Banking and Finance)

Paper Session

Sunday, Jan. 3, 2021 3:45 PM - 5:45 PM (EST)

Hosted By: International Banking, Economics, and Finance Association
  • Chair: Seung Jung Lee, Federal Reserve Board

Catch the Thief! Fraud in the United States Banking Industry

Filippo Curti
,
Federal Reserve Bank of Richmond
Atanas Mihov
,
Federal Reserve Bank of Richmond

Abstract

Little is known about fraud in the financial services sector. Using a rich supervisory dataset, this study dissects fraud at large U.S. banking organizations. We examine the different categories of fraud and their materiality, the recovery from fraud, the time from fraud occurrence to fraud discovery and accounting. We quantify exposure to fraud and study the determinants of fraud at the banking organization level. Lastly, we document a significant effect of fraud on bank credit intermediation. Overall, our analysis provides new, detailed evidence on fraud in the U.S. financial services industry, and its costs and consequences.

Collateral versus Informed Screening during Banking Relationships

Artashes Karapetyan
,
ESSEC Business School
Leon Bogdan Stacescu
,
BI Norwegian Business School

Abstract

We examine banks' choice between two costly instruments used to pick loan applicants: direct screening by acquiring borrower-specific information and collateral requirements. We show that with longer relationships the preference for initial screening increases, while total welfare is enhanced as a result of more efficient selection. The model rationalizes established empirical facts about lending relationships (such as reduced incidence of collateral, but not necessarily lower interest rates in later periods for safer borrowers). The results are stronger under bank competition. Our findings suggest that policies conducive to enduring lending relationships can increase initial access to credit by reducing dependence on collateral.

Deputizing Wall Street to Fight Elder Abuse

Bruce Carlin
,
Rice University
Tarik Umar
,
Rice University
Hanyi Yi
,
Rice University

Abstract

Recently, regulators have deputized financial professionals to help fight financial abuse of the elderly. Since no extrinsic incentives are provided, the success of these new laws depend on intrinsic motivation to protect people who are vulnerable. Exploiting a staggered rollout across the U.S., we show that deputization leads to a 4-6% decrease in suspected cases and a 7% drop in personal bankruptcies. Women, minorities, and unmarried people benefit more. The positive effect is present for financial advisers, but not brokers. Total years in the profession is uncorrelated with the decrease in financial abuse, but tenure in the county where an adviser resides has substantial explanatory power. As we discuss, these results support a mechanism that is based on trust and relationships, rather than egoistic motives. Our findings cast a more positive light on the financial profession. Given that deputization works in this setting, our findings likely understate its potential for other applications.

Lending Relationships and the Pricing of Syndicated Loans

Donghang Zhang
,
University of South Carolina
Yafei Zhang
,
University of South Carolina
Yijia Eddie Zhao
,
University of Massachusetts-Boston

Abstract

In the primary market of syndicated loans, we find that the lead bank makes less adjustment to the initial pricing terms of a loan when it has a stronger relationship with the borrower. A stronger relationship also shortens syndication time and reduces loan underpricing. Lending relationships also reduce lead banks’ reliance on information from syndicate members. Exogenous shocks to relationships caused by bank mergers and closures confirm our findings. Our evidence suggests that lending relationships help price discovery in the pricing process of syndicated loans.
Discussant(s)
Ali Ozdagli
,
Federal Reserve Bank of Boston
Ettore Panetti
,
Bank of Portugal
Larry Santucci
,
Federal Reserve Bank of Philadelphia
Ralf Meisenzahl
,
Federal Reserve Bank of Chicago
JEL Classifications
  • G2 - Financial Institutions and Services