Do lenders securitize or price loans in response to credit risk? Exploiting exogenous variation in regional credit risk due to foreclosure law differences along US state borders, we find that lenders securitize mortgages that are eligible for sale to the Government Sponsored Enterprises (GSEs) rather than price regional credit risk. For non-GSE-eligible mortgages with no GSE buyback provision, lenders increase interest rates as they are unable to shift credit risk to loan purchasers. The results inform the debate surrounding the GSEs' buyback provisions, the constant interest rate policy, and show that underpricing regional credit risk increases the GSEs' debt holdings.

We study how deposit competition affects a bank's decision to securitize mortgages. Exploiting the state-specific removal of deposit market caps across the US as a source of competition, we find a 7.1 percentage point increase in the probability that banks securitize mortgage loans. This result is driven by an 11 basis point increase in deposit costs and corresponding reductions in banks’ deposit holdings. Our results are strongest among banks that rely more on deposit funding. These findings highlight a hitherto undocumented and unintended regulatory cause that motivates banks to adopt the originate-to-distribute model.

WORKING PAPERS:

We examine whether banks manage climate transition risk by securitizing loans granted to firms with poor environmental profiles. We find strong evidence that banks shift climate risk to third parties and are 17 percentage points more likely to sell brown loans. The effect is more prominent for banks that have long-term relationships with brown firms because they are limited in their ability to reduce credit exposure to these firms. Exploiting Donald Trump's election in 2016 as an exogenous shock to transition risk, we show that banks quickly respond to lower transition risk by cutting back on securitization of loans that carry high transition risk. Understanding the climate risk shifting behaviour of banks is important for the design of future bank climate policies, such as climate-related capital requirements.

Does banking supervision affect bank borrowers’ transition to the carbon-neutral economy? We use a unique identification strategy that combines the French bank climate pilot exercise with a proxy that measures borrowers’ transition risk to present two novel findings. First, climate stress tests actively facilitate borrowers’ transition to a low-carbon economy via a lending channel. Stress tested banks increase loan volumes but simultaneously charge higher interest rates for borrowers with high-transition risk. Second, the additional lending is associated with some improvements in environmental performance. While borrowers commit more to carbon emission reduction targets and are more likely to evaluate environmental effects of their projects, they neither reduce direct carbon emissions, nor terminate relationships with environmentally unfriendly suppliers. Our findings establish a causal link between bank climate stress tests and borrowers’ reductions in transition risk.

We evaluate how zombie property law affects mortgage supply, interest rates, and the renegotiation between lenders and borrowers. Exploiting exogenous differences in zombie property law along several US state borders, we document that the law, by imposing a higher cost of post-foreclosure for lenders, causes them to reduce mortgage acceptance rates, raise interest rates, and strategically keep delinquent loans alive. The results are much stronger for non-banks due to their reliance on riskier mortgages.  Our findings inform the debate on policy responses to eliminate zombie properties and enhance mortgage lending practices.