BELINDA TRACEY

Abstract: We show that easing mortgage borrowing constraints generates a sizable local consumption multiplier. Exploiting geographic variation in exposure to the UK’s Help to Buy program—which lowered minimum down payments from 10% to 5%—we find that home purchases in average-exposure districts rose by 18%. Instrumenting home sales with ex ante exposure, we estimate elasticities of household consumption and car sales of 0.3 and 0.5. Two channels drive the multiplier: new home buyers spend an additional £3,200, and this demand boosts local employment and income, amplifying consumption. These findings identify a demand-based mechanism through which credit policy stimulates economic activity.

Abstract: We examine how easing mortgage borrowing constraints affects entry into homeownership. Using administrative mortgage data and cross-district exposure to the UK Help-to-Buy program, which re-opened the 95\% LTV segment in 2013, we show that first-time buyer purchases rose sharply in more exposed areas. Introducing a new proxy for financial support—based on the gap between observed and predicted down payments—we find that gains were concentrated among households unlikely to have relied on transfers, suggesting a weaker role for family wealth in enabling homeownership. Because these buyers tend to have higher incomes, the composition of homeowners shifted toward higher-income households.

Abstract:  Over the past 15 years, banks around the world have been confronted with substantial costs related to misconduct. In this paper, we examine the impact of provisions for misconduct costs on the behavior of UK banks. We first document that misconduct provisions have a significant and negative effect on capital ratios. Next, we show that banks whose capital is reduced by misconduct provisions decrease non-lending activities but increase lending. Lending growth is driven by profitable higher loan-to-value mortgages, which typically incur a lower capital risk-weighting compared to non-lending activities. These results suggest that when faced with a capital shock due to misconduct provisions, banks restore their capital ratios by shifting their balance sheet toward activities that optimize the ratio of profitability to risk-weighted assets.

Abstract: "Zombie lending" occurs when a lender supports an otherwise insolvent borrower. Recent studies document that zombie lending to European firms has been widespread following the onset of the European sovereign debt crisis and COVID-19 pandemic. This paper develops a quantitative model to study the impact of these lending practices on the dynamics and financial decisions of firms. In the model, firm liquidations and zombie lending arise endogenously. The model provides a good match to key euro-area firm statistics over the period 2011 to 2014. The key finding is that zombie lending has a substantial impact on borrowing costs, helping more low-productivity firms to survive. This, in turn, causes a drag on aggregate output, investment and productivity. These results suggest that zombie lending practices contributed to the lower output experienced by the euro area following the onset of the sovereign debt crisis.

Abstract: We examine whether “too-big-to-fail” (TBTF) factors affect estimates of scale economies for large banks. From a standard model of bank production that does not control for any TBTF factors, we find evidence of scale economies for our sample of large banks. We then control for TBTF factors by using a measure of the “implicit subsidy” that emerges from a reduction in TBTF banks’ funding costs due to investor expectations of government support. We do this in two ways: first, we estimate scale economies from an augmented model of bank production that employs a proxy for the counterfactual price of debt that banks would face in the absence of any TBTF funding cost advantage; second, we estimate scale economies from a model of bank production that is estimated only for a sample of banks considered unlikely to be TBTF. After controlling for TBTF factors using either method, we no longer find evidence of scale economies for our sample of large banks. These results suggest that estimated scale economies for large banks are affected by TBTF factors.