WORKING PAPERS

  1. Creditor Rights, Collateral Reuse, and Credit Supply

(previously titled: The Effect of Dealer Leverage on Mortgage Quality)

Theories linking the repledging of collateral to financial instability have been influential in macroeconomics but empirical evidence on them is limited. I utilize a change to bankruptcy treatment of collateral in short-term capital markets to provide causal evidence that strengthened creditor rights increase credit supply and financial instability by increasing the repledging of collateral. Using novel hand-collected data linking dealers to the mortgage companies they funded, I find that dealers exposed to the bankruptcy treatment change increased their repledgeable collateral – consistent with a money multiplier – and their credit supply to mortgage companies during the 2000s. I estimate the money multiplier of private-label mortgage collateral to be 4.5 times that of Treasuries, shedding new light on the previously unknown size of this multiplier. I establish that increased dealer credit provision drove mortgage companies to increase originations and pivot toward risky products. I estimate that the expansion in credit increased originations by 9% and accounted for 38% of defaults on mortgages originated during 2005-2006, driving the “last gasp” in the home price boom and its bust.

2. The Real Effects of Capping Bank Leverage

In this paper, I study the effects of bank leverage ratio restrictions in a general equilibrium model of the macroeconomy where lenders can anticipate bank runs. This framework allows the analysis of the tradeoffs associated with bank capital requirements – while unlimited leverage allows capital to flow most freely to its most efficient users, limiting leverage through capital requirements reduces the probability of a bank run. This model enables me to study the general equilibrium effects of these tradeoffs on household welfare to understand characteristics of the optimal bank leverage ratio requirement. I find that the optimal leverage restriction will be time varying across the business cycle. When the household’s marginal utility of consumption is highest, the leverage ratio requirement should be the least restrictive. Conversely, when the household’s marginal utility approaches its steady state level, the optimal leverage ratio becomes more restrictive.

WORK IN PROGRESS

3. The Real Effect of Bank Regulation Through Non-Bank Lenders (with Erica Jiang)

4. Do Credit Policies Differentially Affect Racial Groups? Evidence from the Mortgage Market