Banking and Real Economy
Paper Session
Saturday, Jan. 8, 2022 3:45 PM - 5:45 PM (EST)
- Chair: Zhiguo He, University of Chicago
Do Mortgage Lenders Compete Locally? Implications for Credit Access
Abstract
We study the impact of mortgage lender concentration on household credit access. An extensive literature has found little to no relationship between local lender concentration and mortgage interest rates; consequently, federal regulators regard mortgage markets as national and view their local concentration as irrelevant to financial regulation and monetary policy. We argue that this view is incomplete, showing that although local concentration has no influence on interest rates, it strongly affects lending standards and upfront fees. In more concentrated areas, mortgage application rejection rates are higher (this effect is particularly pronounced for low-income, female, and racial-minority applicants), and the pool of originated mortgages is less risky in terms of both ex-ante credit scores and ex-post default. On the intensive margin, lenders charge higher fees in more concentrated markets: non-interest fees are on average 35 basis points higher in the 10% most concentrated markets than in the 10% least concentrated markets. Again, these effects are strongest among minority applicants. Our findings suggest that contrary to current policy, regulators concerned with credit access should regard mortgage markets as local when making policy decisions such as bank merger approvals.Bank Diversification and Lending Resiliency
Abstract
In periods of economic crisis, it is essential that banks continue lending to encourage economic recovery. In this paper, we show that bank diversification is an important factor for banks’ lending during a crisis. Banks with higher levels of geographic or business-line diversification expand credit supply during such periods, relative to less diversified banks. A more diversified stream of earnings enable banks to better able to absorb negative shocks and continue lending to different segments. By lending more, they provide valuable positive spillover effects to the economy. Using changes in bank regulation as exogenous shocks to diversification, we confirm that the lending effects stem from differences in diversification. Our results speak to the long-standing debate in the literature and among policy makers about whether the expansion of banks into new activities benefits or threatens the economy, and provide some counterbalance to concerns about the systemic risk implications of bigger banks.Zombie Lending and Cross-Subsidization in a Lending Crisis
Abstract
We study the corporate-loan pricing decisions of a major Greek bank at the peak of the Greek financial crisis. A unique aspect of the dataset is that we can observe both the loan-level interest rate and “breakeven” rate that the pricing department of the bank provides to its loan managers for the loan negotiations. This allows a straightforward measurement of the gap between actual and breakeven rate, i.e., the “markup”. We document positive and significant markups for safer borrowers and small (or even negative markups) to riskier borrowers. This direct evidence confirms the fears of a de facto cross-subsidization of bad creditors by better creditors in a time of crisis. We rationalize this finding through the lens of a dynamic corporate finance model.Discussant(s)
Elena Carletti
,
Bocconi University
Anthony Lee Zhang
,
University of Chicago
Philip Strahan
,
Boston College
Sascha Steffen
,
Frankfurt School of Finance and Management
JEL Classifications
- G1 - Asset Markets and Pricing