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Vahid Saadi, Ph.D.

Assistant Professor of Finance - IE Business School

Research Affiliate - Halle Institute for Economic Research (IWH)

Research interests: Empirical Banking and Real Estate Finance

Role of the Community Reinvestment Act in Mortgage Supply and the U.S. Housing Boom, The Review of Financial Studies, 2020, 33(11), 5288-5332.
- - This paper studies the role of the Community Reinvestment Act (CRA) in the U.S. housing boom-bust cycle. I find that enhanced CRA enforcement in 1998 increased the growth rate of mortgage lending by CRA-regulated banks to CRA eligible census tracts. I show that during the boom period house price growth was higher in the eligible census tracts because of the shift in mortgage supply of regulated banks. Consequently, these census tracts experienced a worse housing bust. I find that CRA-induced mortgages were awarded to borrowers with lower FICO scores and were more frequently delinquent.

Public Bank Guarantees and Allocative Efficiency, with Reint Gropp and Andre Guettler, Journal of Monetary Economics, 2020, 116, 53-69.
- - We use a natural experiment and matched bank/firm data to identify the effects of bank guarantees on allocative efficiency. We find that with guarantees in place unproductive firms invest more and maintain higher rates of sales growth. Moreover, firms produce less productively. Firms also survive longer in banks’ portfolios and those that enter guaranteed banks’ portfolios are less productive. Finally, we observe fewer economy-wide firm exits and bankruptcy filings in the presence of guarantees. Overall, the results are consistent with the idea that guaranteed banks keep unproductive firms in business for too long and prevent their exit from the market.

The Cleansing Effect of Banking Crises, with Reint Gropp, Steven Ongena, and Jörg Rocholl, Economic Inquiry, 2022, 1-28
- - We assess the cleansing effects of the 2008-2009 financial crisis. U.S. regions with higher levels of supervisory forbearance on distressed banks see less restructuring in the real sector: fewer establishments, firms, and jobs are lost when more distressed banks remain in business. In these regions, the banking sector has been less healthy for several years after the crisis. Regions with less forbearance experience higher productivity growth after the crisis with more firm entries, job creation, and employment, wages, patents, and output growth. Forbearance is greater for state-chartered banks and in regions with weaker banking competition and more independent banks.

Banking Market Structure and Trade Shocks, with Mohammad Izadi, Journal of Banking and Finance, 2023
- - The structure of the local banking market, characterized by bank specialization and bank concentration, can affect credit and labor market responses to an import shock to the local economy. During the surge in U.S. imports from China from 1998 to 2006, small business loans (SBL) decline in counties that face a larger import shock. Bank geographical specialization positively affects banks' SBL origination in response to the import shock. Consistent with these results, average employment declines in counties hit by the import shock, while higher bank specialization attenuates this negative labor outcome. Furthermore, in the face of import competition, credit support by specialized banks helps small businesses to respond to the heightened competition through firm innovation. We find little evidence for such stabilizing effects for bank concentration.

Bank Municipal Bond Holdings and Mortgage Lending Standards, with Omar Rachedi, 2023
- - We show in this paper that tax exemptions on income from municipal bonds distort bank mortgage lending standards. Banks in states with a larger tax exemption hold more municipal bonds on their balance sheets. These holdings expose banks to local risks, in particular to real estate risk as municipal bonds are financed to a large extent via property tax revenues with a large elasticity with respect to house prices. We show that banks with a higher share of municipal bonds on their balance sheets divert their mortgage originations out of their home states by relaxing their mortgage lending standards. We provide evidence that this geographical diversification is costly in that banks originate mortgages with lower FICO scores, and higher loan-to-value ratios and interest rates away from their home states. We use the exogenous shift in municipal bond prices, driven by the 2010 rating recalibration by Moody's, to establish the causal relationship between municipal bond holdings and mortgage lending standards.

- Import Competition and Bank Portfolio Rebalancing, 2023
  - This paper shows that the rise in import competition from China forced U.S. banks to rebalance their credit portfolios away from business loans and towards mortgage lending during the period from 1999 to 2006. We show that while aggregate mortgage lending declines in exposed counties, banks that are more exposed to the rise in import competition increase their mortgage origination significantly in non-exposed areas, and expand their geographical reach into new counties. Mortgages originated by such banks in new counties are more likely to be high-interest loans issued to low-FICO score, high-LTV (loan-to-value) borrowers that would have otherwise been credit rationed. Overall, our findings show that banks that are more exposed experience a rebalancing of their loan portfolio towards residential loans during the sample period. Our findings highlight the role of increased import competition from China for the rapid increase in size and riskiness of the U.S. mortgage market prior to the 2007-09 mortgage crisis.