Determinants of Bank Lending
Sunday, Jan. 7, 2018 8:00 AM - 10:00 AM
- Chair: W. Scott Frame, Federal Reserve Bank of Atlanta
The Interest of Being Eligible
AbstractMajor central banks accept pooled individual corporate loans as collateral in their regular refinancing operations with credit institutions. Such “eligible” loans to firms provide therefore a potential liquidity advantage to the banks that originate them. Banks may pass this advantage on to the borrowers in the form of a reduced liquidity risk premium: the eligibility discount. We exploit a temporary surprise extension of the ECB’s universe of eligible collateral to medium-quality corporate loans, the Additional Credit Claim (ACC) program of February 2012, to assess the eligibility discount to corporate loans spreads in France. We find that, in spite of the high haircuts, becoming eligible to the ECB’s collateral framework translates into a reduction in rates by 7-10bp for new loans issued to ACC-firms, controlling for loan-, firm- and bank-level characteristics. We then look at lender characteristics and examine their role in the pass-through of the liquidity advantage for banks to the eligibility discount for firms. In line with the opportunity-cost view of collateral choice, we find evidence that this collateral channel of monetary policy is only active for banks that already pledged more credit claims as collateral with the ECB and held a larger share of ACC-eligible loans in their portfolios.
The Securitization Flash Flood
AbstractWhat caused the flood of securitized products in the years immediately preceding the crisis? This paper presents evidence that demand for safe collateral in repo markets made it attractive for financial institutions to issue securitized products. Using the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) as a natural experiment that shocked the demand for collateral in repo markets, this paper establishes collateralized borrowing in short-term debt markets as a contributing factor to the rise of mortgage securitization. Hand-collected data on over 900 repurchase contracts from S.E.C N-Q filings reveals underwriters of securitized products increased use of mortgage-based repos in the months following the law change. Highlighting an important connection between repo markets and securitization activity, this paper suggests the regulatory focus in Dodd-Frank (Title IX, Subtitle D) may be misdirected.
Safe Collateral, Arm’s-length Credit: Evidence From the Commercial Real Estate Mortgage Market
AbstractWhen collateral is safe, there are fewer opportunities for lenders to suffer economic losses. We
develop a model to show how risky and safe collateral naturally pair with different types of
lenders according to how informed the lenders are in states where borrowers are in financial
distress. Our application is to the commercial real estate mortgage market where we compare
loans funded by commercial mortgage-backed securities (CMBS) to bank loans. We model CMBS investors as lower cost providers of funding, but less informed, and vice-versa for banks. This leads to a separating equilibrium where only safe collateral is funded by CMBS and risky collateral is funded by bank lenders. This prediction is tested using the 2007-2009 shutdown of the CMBS market as a natural experiment, where suddenly collateral usually funded with CMBS were instead financed with bank loans. Our results show that loans with CMBS-like qualities that were “counterfactually” funded by banks were less likely to default or be renegotiated. We conclude that the securitization channel in this market, when available, funds safer collateral.
- G2 - Financial Institutions and Services