distance bank heterogeneity and entry in local banking markets we examine the determinants of entry into italian local banking markets during the period 1991 2002 and build a simple model in which the probability of branching in a new market depends on the features of both the local market and the potential entrant econometric findings show that banks are more likely to expand into those markets that are closest to their pre entry locations large banks are also more able to cope with distance related entry costs than small banks finally banks have become increasingly able to open branches in distant markets due to the advent of information and communication technologies

credit rationing and credit view empirical evidence from an ethical bank in italy attempts have been made in the empirical literature to identify credit rationing and its determinants using balance sheet data or evidence from corporate surveys however observational equivalence identification problems and interview biases are serious problems in these studies we analyze directly the determinants of credit rationing in credit files by examining the differencebetweentheamountsdemandedbyandsuppliedtoeachborrower as shown by official bank records our findings provide microeconomic evidence that supports the credit view hypothesis by showing that the european central bank refinancing rate is significantly and positively related to partial but not total credit rationing this finding is consistent with the hypothesis that this variable affects the total volume of bank loans

checkerboards and coase the effect of property institutions on efficiency in housing markets abstract in the late 1800s palm springs california was evenly divided into 1 mile square blocks like a checkerboard and property rights were assigned in alternating blocks to the agua caliente tribe and a non indian landowner by the u s federal government the quasi experimental nature of land assignment holds land quality constant across the two types of landowners sales mortgaging and leasing restrictions on the agua caliente reservation land created large transaction costs to development on those lands consequently there was very little housing investment the non indian blocks which were extensively developed provide a benchmark for efficient outcomes for the agua caliente lands once the restrictions on agua caliente lands were relaxed in 1959 the number of homes and real estate values converged to those of non indian owned lands as predicted by the coase theorem

does liberalization reduce agency costs evidence from the indian banking sector abstract on february 16 2002 the reserve bank of india issued a circular that signaled a policy liberalization facilitating acquisition of private sector banks in india by foreign entities portfolios of private sector and nationalized banks posted significant value gains in the days surrounding the announcement the gains by private sector banks were almost double those of nationalized banks we further analyze the firm specific abnormal returns using cross sectional regressions and find a significant relation between firm specific abnormal returns and factors typically associated with a bank s potential for takeover these results provide the first empirical support for stulz s hypothesis that one cause of the valuation gains associated with liberalization is the expected gain from a reduction of agency costs

investment cash flow sensitivities credit rationing and financing constraints in small and medium sized firms the controversy on whether investment cash flow sensitivity is a good indicator of financing constraints is still unsolved we apply a comprehensive approach by cross validating our analysis with both balance sheet and qualitative data on self declared credit rationing and financing constraints on a sample of mainly small and medium sized firms our qualitative information shows that self declared credit rationing is weakly related to both traditional a priori factors such as firm size age and location and lenders rational decisions taken on the basis of their credit risk models we use the qualitative information on firms which were denied additional credit to provide evidence relevant to the investment cash flow sensitivity debate the evidence shows that self declared credit rationing significantly discriminates between firms which possess or not such sensitivity while a priori criteria do not the same result does not apply when we consider the wider group of financially constrained firms which do not seem to have a higher investment cash flow sensitivity supporting the more recent empirical evidence in this direction

household risk management and optimal mortgage choice the portfolio of the typical american household is quite unlike the diversie ed portfolio of liquid assets discussed in e nance textbooks the major asset in the portfolio is a house a relatively illiquid asset with an uncertain capital value the value of the house generally exceeds the net worth of the household which e nances its homeownership through a mortgage contract to create a leveraged position in residential real estate other e nancial assets and liabilities are typically far less important than the house and its associated mortgage contract the importance of housing in household wealth is illustrated in figure i this e gure plots the fraction of household assets in housing and in equities against the wealth percentile of the household poor households appear at the left of the e gure and wealthy households at the right data come from the 1989 and 1998 survey of consumer finances the e gure shows that middle class american families from roughly the fortieth to the eightieth percentile of the wealth distribution have more than half their assets in the form of housing even after the expansion of equity ownership during the 1990s equities are of negligible importance for these households 1

the effect on competition of banking sector consolidation following the financial crisis of 2008 abstract consolidation of the spanish banking sector after the financial crisis of 2008 raises concerns about potential negative effects on competition i use structural econometric methods to examine these anti competitive concerns in the spanish mortgage market i estimate a mixed logit model of mortgage demand and recover bank level cost information with a strategic model of price competition counterfactual experiments reveal that the observed increase in concentration is associated only with small variations in mortgage rates and market shares staying far from collusive levels this moderate change in industry conduct implies a small direct effect of consolidation on bank exposures to mortgage risk

household debt and monetary policy revealing the cash flow channel we study the effect of monetary policy on spending when households hold debt with variable interest rates when interest rates on outstanding loans vary with the short term market interest rate monetary policy has a direct and immediate effect on households expenses and disposable income if households are borrowing constrained they will respond to a shock to disposable income by adjusting their spending as a result a monetary policy induced interest rate change leads to a larger change in consumption than what is predicted by the elasticity of intertemporal substitution we examine this cash flow channel of monetary policy using administrative data on swedish households we estimate a strong and statistically significant response in spending to changes in interest expenses more specifically we estimate a marginal propensity to consume including durable consumption that is around unity or even higher in response to monetary policy induced changes in interest expenses for example highly indebted households with adjustable rate mortgages reduce consumption growth by several percentage points more in response to a one percentage point increase in the household interest rate than households with little debt or fixed rate mortgages our findings imply that monetary policy will have a stronger effect on real economic activity when households are highly indebted and have adjustable rate mortgages jel classification d14 e21 e52 g11

interest rate changes mortgages and consumption evidence from italy summaryusing the italian survey of household income and wealth we study whether the drop in interest rates following the great recession was associated with an increase in consumption for households with adjustable rate mortgages arm relative to those with fixed rate mortgages frm after the reduction in mortgage payments consumption of arm holders increases relative to frm but the implied marginal propensity to consume is not statistically different from zero we suggest three explanations for the weak consumption response to the income shock first cash on hand and debt heterogeneity may attenuate the consumption response second borrowers believe that the income shock was short lasting and that interest rates would likely increase in the future implying a small effect on consumption third the shock is offset partly by a reduction in income from financial assets owned by mortgagors the findings have implications for the conduct of monetary policy interventions and the credibility of the future path of interest rates pass through of monetary policy and design of the mortgage market

evidence on the benefits of alternative mortgage products alternative mortgage products have been identified by many as culprits in the financial crisis however because of their lower initial mortgage payments relative to loan amount they may be a valuable tool for households that expect higher and more certain future labor income and that wish to smooth consumption over the life cycle using u k household level panel data this paper provides evidence in support of this hypothesis and highlights other important benefits of alternative mortgages including portfolio diversification tax benefits and a reduction in the transaction costs incurred in housing transactions

a model of mortgage default in this paper we solve a dynamic model of households mortgage decisions incorporating labor income house price inflation and interest rate risk using a zero profit condition for mortgage lenders we solve for equilibrium mortgage rates given borrower characteristics and optimal decisions the model quantifies the effects of adjustable versus fixed mortgage rates loan to value ratios and mortgage affordability measures on mortgage premia and default mortgage selection by heterogeneous borrowers helps explain the higher default rates on adjustable rate mortgages during the recent u s housing downturn and the variation in mortgage premia with the level of interest rates

the monetary transmission mechanism an empirical framework this paper provides an overview of the monetary transmission mechanism describing the impact of changes in monetary policy on real gdp changes in financial market prices including long term interest rates and exchange rates are the main vehicle for the transmission of policy the framework incorporates rational expectations and policy rules it is empirical and appears to fit the facts well

the reaction of consumer spending and debt to tax rebates evidence from consumer credit data we use a new panel data set of credit card accounts to analyze how consumers responded to the 2001 federal income tax rebates we estimate the monthly response of credit card payments spending and debt exploiting the unique randomized timing of the rebate disbursement we find that on average consumers initially saved some of the rebate by increasing their credit card payments and thereby paying down debt but soon afterward their spending increased counter to the permanent income model spending rose most for consumers who were initially most likely to be liquidity constrained whereas debt declined most so saving rose most for unconstrained consumers

optimal mortgage design this article studies optimal mortgage design in a continuous time setting with volatile and privately observable income costly foreclosure and a stochastic market interest rate we show that the features of the optimal mortgage are consistent with an option adjustable rate mortgage option arm under the optimal contract the borrower is given discretion of how much to repay until his balance reaches a certain limit the default rates and interest rate payment on the mortgage correlate positively with the market interest rate gains from using the optimal contract relative to simpler mortgages are the biggest for those who face more income variability buy pricey houses given their income level or make little or no down payment our model thus may help to explain a high concentration of option arms among riskier borrowers jel g20 g21 g33

the rise and fall of the arm an econometric analysis of mortgage choice this paper estimates an empirical model of the choice between adjustable and fixe d rate mortgages using a large national database compiled by the nat ional association of realtors the explanatory variables in the probi t choice equation include borrower characteristics regional dummies the frm rate and the frm arm rate differential since the intrerest rate on the mortgage not chosen is unobserved this rate must be est imated in a way that eliminates selectivity bias simulation of the e stimated choice equation provides insight into the origin of the arm revolution copyright 1988 by mit press

what calls to arms international evidence on interest rates and the choice of adjustable rate mortgages the form of the interest rate on newly issued mortgages namely whether they are adjustable rate mortgages arms or fixed rate mortgages frms varies considerably both across countries and over time we attempt to uncover the sources of this variation in the arm share of arms issued relative to total mortgage issuance our emphasis is on drawing inferences about how household mortgage choice is affected by households reactions to movements in interest rates we complement newly assembled panel data from nine countries on the arm share and mortgage interest rates with a panel instrumental variables approach in which we test exclusion restrictions that are implied by alternative explanations for variation in the arm share we uncover strong evidence in favour of current cost minimization as the proximate driver of household mortgage choice

are mergers beneficial to consumers evidence from the market for bank deposits the general conclusion of the empirical literature is that in market consolidation generates adverse price changes harming consumers previous studies however look only at the short run pricing impact of consolidation ignoring effects that take longer to materialize using a database that includes detailed information on the deposit rates of individual banks in local markets for different categories of depositors we investigate the long run price effects of mergers we find strong evidence that although consolidation does generate adverse price changes these are temporary in the long run efficiency gains dominate over the market power effect leading to more favorable prices for consumers jel g21 g34 l1

macroeconomic effects of the mortgage refinance and the home equity lines of credit abstract i examine how the mortgage refinance and the home equity lines of credit heloc impact the increase in pre crisis mortgage debt and post crisis mortgage defaults financially constrained homeowners can cash out funds through refinancing mortgages or extract home equity through heloc my quantitative exercise shows that prevalent usage of refinancing increases pre crisis mortgage debt which amplifies the post crisis foreclosure rate heloc also contributes to an increase in mortgage defaults though it negligibly impacts pre crisis mortgage debt

asset restructuring strategies in bank acquisitions does distance between dealing partners matter abstract one of the most lively debated effects of banking acquisitions is the change in lending and asset allocation of the target bank in favour of transaction based products at the expense of small and informationally opaque borrowers these changes may be the result of two distinct restructuring strategies pursued by the acquirer with respect to the asset portfolio of the acquired bank a cleaning strategy cs in which the acquirer makes a clean sweep of all the negative net present value activities in the portfolio of the acquired bank and a portfolio strategy ps in which the acquiring bank permanently changes the portfolio allocation of the acquired bank in this paper we focus on italian bank acquisitions and test which asset restructuring strategy was predominantly pursued over the period 1997 2003 moreover we distinguish acquisitions according to their geographic diversifying character and to the physical and cultural distances that separate acquiring from acquired banks when we look at the mean value we do not find clear evidence of a primacy either of css or pss when we separate in market from out of market bank acquisitions however results show that the css prevail only in the former type of deals while in the latter the portfolio of acquired banks is subject to pss finally we find that differences in asset restructuring strategies can be explained by differences in corporate culture and the workplace environment of the dealing partners

why do banks merge the banking industry is consolidating at an accelerating pace yet no conclusive results have emerged on the benefits of mergers and acquisitions in order to investigate the motives and results of each type of deal we consider separately acquisitions that is the purchase of the majority of voting shares and mergers using italian data mergers seek to improve income from services but the increase is offset by higher staff costs return on equity improves because of a decrease in capital acquisitions aim to restructure the loan portfolio of the acquired bank improved lending policies result in higher profits

winners or losers the effects of banking consolidation on corporate borrowers we estimate the impact of bank mergers and acquisitions m as on outstanding credit credit lines and the sensitivity of investment to cash flow using a large sample of italian corporate borrowers we distinguish between firms that experienced relationship termination as a consequence of bank m as and those that did not our findings are consistent with bank m as having an adverse effect on credit particularly when the m a is followed by relationship termination the effect persists 3 years and then is absorbed suggesting that firms are able to compensate for the negative shock in the past decade many countries experienced a wave of mergers and acquisitions m as that profoundly modified the structure of their banking industries group of ten 2001 one of the key questions that has emerged in the academic and policy debates is what the consequences of m as are for bank borrowers the empirical literature on bank m as studies extensively the effects of consolidation on bank performance and local market conditions particularly in terms of efficiency and market power see berger demsetz and strahan

choosing between fixed and adjustable rate mortgages note introduction in recent years mortgage borrowers have been given a wide variety of financing methods from which to choose e g guttentag 1983 barnett and mckenzie 1984 examples include assumptions adjustable rates shared appreciation growing equity and numerous others by far the dominant two have been the standard fixed rate and the adjustable rate mortgage beginning with regulation changes in 1979 adjustable rate mortgage lending at first was fairly restricted but with the major deregulation change in 1981 the types of adjustable rate mortgages have proliferated 2 now lenders have the flexibility to use numerous indexes including inflation and disposable income indexes make interest rate changes independent of payment changes and allow negative amortization the purpose of this paper is to examine the choice between fixed and adjustable rate mortgages 3 two views have dominated the theoretical literature one that emphasizes the irrelevance of borrower characteristics in the mortgage choice decision given the prices and terms of the contract and one that focuses on the potential impact of borrower characteristics assuming asymmetric information 4 this paper is the first to examine empirically the impact of pricing and borrower characteristics on the choice of mortgage contract

megamergers and expanded scope theories of bank size and activity diversity we point to the vast empirical literature in banking to argue that the current expansion of scale and scope in banking represents a puzzle we then present two explanations that help us to understand why banks are getting bigger and doing more our explanations suggest that banks may be doing this to increase their shareholders wealth and or merely to enhance the reputation of their management ceos the latter could lead to herd behavior involving banks that increase size and scope despite a dissipation of shareholders wealth alternatively increasing size and scope may oaer strategic benefits and hence increase shareholder wealth in an environment with suacient profitability in current operations and substantial uncertainty about future core competencies we explore conditions under which either one of these competing explanations may dominate 1999 elsevier science b v all rights reserved

effects of heterogeneity on bank efficiency scores bank efficiency estimates often serve as a proxy of managerial skill since they quantify sub optimal production choices but such deviations can also be due to omitted systematic differences among banks in this study we examine the effects of heterogeneity on bank efficiency scores we compare different specifications of a stochastic cost and alternative profit frontier model with a baseline specification after conducting a specification test we discuss heterogeneity effects on efficiency levels ranks and the tails of the efficiency distribution we find that heterogeneity controls influence both banks optimal costs and profits and their ability to be efficient differences in efficiency scores are important for more than only methodological reasons first different ways of accounting for heterogeneity result in estimates of foregone profits and additional costs that are significantly different from what we infer from our general specification second banks are significantly re ranked when their efficiency is estimated with a specification other than the preferred general specification third the general specification gives the most reliable estimates of the probability of distress although differences to the other specifications are low

the response of household consumption to income tax refunds a central implication of the life cycle or permanent income theory is that consumption should not respond to predictable fluctuations in income tests of this implication have yielded mixed results especially on micro data angus deaton 1992 martin browning and annamaria lusardi 1996 in large part this might be due to the difficulties of isolating the predictable component of income at the micro level most tests proceed by instrumenting for income but since the available instruments are typically poor such tests might be prejudiced against finding significant excess sensitivity of consumption to income john shea 1995 also it is not clear how closely the resulting econometric predictions of income coincide with agents actual expectations of income to avoid these difficulties this paper examines the response of household consumption to a particular type of income that is both predictable and transitory income tax refunds since a refund depends on events in the previous calendar year it is predictable income as regards consumption in the year of its receipt consequently under the life cycle theory consumption should not increase on receipt of a refund 2 in addition to testing the canonical model of consumption this paper provides estimates interpretable as the marginal propensity to consume mpc out of refunds since federal tax refunds now amount to over 80 billion per year averaging well over 1 000 per refund these estimates are of interest in themselves more generally they bear on the impact of even preannounced and temporary changes in fiscal policy the paper begins by surveying related studies in section i section ii describes the data the consumer expenditure survey cex which of the leading u s micro data sets has the most comprehensive coverage of expenditure the empirical specification is set out in section hi section iv reports the results and section v concludes

who bears interest rate risk we study the allocation of interest rate risk within the european banking sector using novel data banks exposure to interest rate risk is small on aggregate but heterogeneous in the cross section contrary to conventional wisdom net worth is increasing in interest rates for approximately half of the institutions in our sample cross sectional variation in banks exposures is driven by cross country differences in loan rate fixation conventions for mortgages banks use derivatives to partially hedge on balance sheet exposures residual exposures imply that changes in interest rates have redistributive effects within the banking sector received october 31 2017 editorial decision august 30 2018 by editor philip strahan authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

efficiency effects of horizontal in market bank mergers abstract this study conducts tests to determine whether banks involved in horizontal mergers achieve efficiency improvements relative to other firms the analysis covers 898 bank mergers from 1981 to 1986 efficiency is measured by various expense ratios the results based on ols and logit analysis are robust they indicate that during 1981 1986 horizontal bank mergers did not yield efficiency gains notably the findings are based on the mergers believed to be most likely to result in efficiency gains i e they are horizontal mergers the firms exhibit considerable deposit overlap and the acquiring firms are on average more efficient than the acquired

multimarket contact competition and pricing in banking abstract in this paper we assess the impact of multimarket contact of banks on their market power by means of a simultaneous equation model in which the divergence of price from marginal cost is a function of multimarket linkages the model is estimated using aggregate data from the italian regions for the years 1997 2009 our results show that multimarket contact is positively and significantly correlated to the market power index and is also connected to both home and non home market concentration the evidence is robust to changes in model specification and multimarket contact measures and supports the idea that firms which have a greater amount of contact are more likely to collude

are there asymmetries in the response of bank interest rates to monetary shocks this article examines the velocity and asymmetry of the response of bank interest rates to monetary policy shocks using an asymmetric vector error correction model it analyses the pass through of changes in money market rates to retail bank interest rates in italy in the period 1985 2002 the main results of the article are 1 the speed of adjustment of bank interest rates to monetary policy changes increased significantly after the introduction of the 1993 consolidated law on banking 2 interest rate adjustment in response to positive and negative shocks is asymmetric in the short run but not in the long run 3 banks adjust their loan deposit rate faster during periods of monetary tightening easing 4 this asymmetry almost vanished since the 1990s

optimal contracts and supply driven recessions abstract in models with financial frictions state contingent contracts stabilize the business cycle relative to contracts with predetermined repayments we show that this finding depends on whether predetermined repayments are set in real or nominal terms state contingent contracts may amplify supply driven recessions compared to contracts set in nominal terms

how have borrowers fared in banking mega mergers previous studies of event returns surrounding bank mergers show that banks gain value in megamergers and additional value when they absorb in market competitors a portion of these gains has been traced to the increased bargaining power of banks vis a vis regulators and other competitors we demonstrate that increased bargaining power of megabanks adversely affects loan customers of the acquired institution wealth losses are greater when loan customers are credit constrained the loan customer is smaller or the acquisition is an in market deal these findings reinforce complaints that the ongoing consolidation in banking has unfavorably affected the availability of credit for smaller firms and especially capitalconstrained firms

the changing structure of local credit markets are small businesses special abstract in many countries consolidation in the banking industry has reduced the number of small banks and led to significant shifts in market shares deregulation has fostered entry in local credit markets and the expansion of branch networks increasing competition in local markets small businesses are believed to be more vulnerable to these changes since they are more dependent on credit from local banks in this paper we investigate the consequences of consolidation and entry for these borrowers compared with those for large firms we employ a data set for italy which provides information on volumes of loans and bad loans by size of borrower with a detailed geographical partition we find that mergers are followed by a temporary reduction in outstanding credit to all sizes of borrowers and by an increase in bad loans most likely due to the reassessment of banks portfolios entry has a relatively persistent negative impact on credit supply to small and medium sized firms our results also show that concentration branch density and the share of branches of small banks affect the volumes of credit and bad loans of small borrowers