(with Saket Hegde and Edison Yu)
Using loan-level regulatory data, this paper finds that banks reduce risk-taking in their loan portfolio after bank-level uncertainty rises. Banks also increase interest rates and require collateral in loan contracts after positive uncertainty shocks, especially among banks with less regulatory capital that are also subject to mark-to-market accounting regulations. In response, public firms borrowing from these banks hold more cash and reduce investment and employment. Riskier private firms turn to shorter duration and higher cost credit, such as credit cards and trade credit, increasing illiquidity. Local employment also declines after bank uncertainty increases. Taken together, uncertainty shocks in the banking system significantly affect the economy.
This paper shows that monetary policy influences bank credit policy through the risk taking channel. Using option prices on FOMC announcement days, we measure the impact of monetary policy on bank equity tail risks and link them to loan-level regulatory data. Banks that experience a decline in tail risk lend more to riskier firms and ease loan terms in the three weeks after the FOMC. These effects are concentrated among banks with short-term compensation structures and in competitive credit markets. Our results isolate the impact of bank risk-taking in loan supply from confounding forces such as endogenous credit demand and highlight how institutional frictions mediate the risk-taking channel of monetary policy.
(joint with Haoyang Liu, W. Ben McCartney, Calvin Zhang and Xiaohan Zhang)
We document that borrowers who refinanced their mortgages between 2009 and 2012, a period marked by falling mortgage rates, were more likely to vote in the 2012 general election than similar borrowers who did not. An eligibility cutoff in the Home Affordable Refinance Program (HARP) helps identify a causal relationship. Consistent with the resource model of voting, we find that the effect of refinancing on voting is larger for borrowers with lower incomes and larger debt service reductions. Our findings shed new light on the causes of voter turnout and the political economy of mortgage credit.