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This paper identifies the international credit channel of monetary policy by analyzing the universe of corporate loans in Mexico, matched with firm and bank balance-sheet data, and by exploiting foreign monetary policy shocks, given the large presence of European and U.S. banks in Mexico. The paper finds that a softening of foreign monetary policy increases the supply of credit of foreign banks to Mexican firms. Each regional policy shock affects supply via their respective banks (for example, U.K. monetary policy affects credit supply in Mexico via U.K. banks), in turn implying strong real effects, with substantially larger elasticities from monetary rates than quantitative easing. Moreover, low foreign monetary policy rates and expansive quantitative easing increase disproportionally more the supply of credit to borrowers with higher ex ante loan rates-reach-for-yield-and with substantially higher ex post loan defaults, thus suggesting an international risk-taking channel of monetary policy. All in all, the results suggest that foreign quantitative easing increases risk-taking in emerging markets more than it improves the real outcomes of firms.
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This paper identifies the international credit channel of monetary policy by analyzing the universe of corporate loans in Mexico, matched with firm and bank balance-sheet data, and by exploiting foreign monetary policy shocks, given the large presence of European and U.S. banks in Mexico. The paper finds that a softening of foreign monetary policy increases the supply of credit of foreign banks to Mexican firms. Each regional policy shock affects supply via their respective banks (for example, U.K. monetary policy affects credit supply in Mexico via U.K. banks), in turn implying strong real effects, with substantially larger elasticities from monetary rates than quantitative easing. Moreover, low foreign monetary policy rates and expansive quantitative easing increase disproportionally more the supply of credit to borrowers with higher ex ante loan rates-reach-for-yield-and with substantially higher ex post loan defaults, thus suggesting an international risk-taking channel of monetary policy. All in all, the results suggest that foreign quantitative easing increases risk-taking in emerging markets more than it improves the real outcomes of firms.
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This study investigates the existence of political rents in bank lending, using a comprehensive loan-level data set of the universe of commercial loans in Mexico from 2003 to 2012. Identification relies on changes in the state of origin of a senate committee chairman as a source of exogenous variation in firms' political relationship. The study finds that banks offer favorable loan terms to politically connected firms with larger loan quantities, lower loan spreads, longer maturities, and lower collateral requirements. Furthermore, political loans exhibit higher default rates. To isolate the bank supply channel, a rich set of fixed-effects is included with various specifications. The favorable lending increases with the strength of a firm's political connection, varies gradually along the political cycle, and is mainly offered by large and domestic banks. Consistent with the quid pro quo hypothesis, the study finds that banks that extend political loans receive significantly more government borrowings with better credit quality. The study also shows that the greater credit supply due to political connection leads to a large and significant increase in firm-level employment and assets. The study provides estimates of the total social cost of political lending and net revenue for banks that are engaged in rent provision activity. Finally, a series of robustness tests are performed to rule out alternative mechanisms and explanations.
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This study investigates the existence of political rents in bank lending, using a comprehensive loan-level data set of the universe of commercial loans in Mexico from 2003 to 2012. Identification relies on changes in the state of origin of a senate committee chairman as a source of exogenous variation in firms' political relationship. The study finds that banks offer favorable loan terms to politically connected firms with larger loan quantities, lower loan spreads, longer maturities, and lower collateral requirements. Furthermore, political loans exhibit higher default rates. To isolate the bank supply channel, a rich set of fixed-effects is included with various specifications. The favorable lending increases with the strength of a firm's political connection, varies gradually along the political cycle, and is mainly offered by large and domestic banks. Consistent with the quid pro quo hypothesis, the study finds that banks that extend political loans receive significantly more government borrowings with better credit quality. The study also shows that the greater credit supply due to political connection leads to a large and significant increase in firm-level employment and assets. The study provides estimates of the total social cost of political lending and net revenue for banks that are engaged in rent provision activity. Finally, a series of robustness tests are performed to rule out alternative mechanisms and explanations.
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This paper shows how the creation of ceilings on local public debt can increase economic activity. For identification, the paper exploits administrative micro data in conjunction with the introduction of a Mexican law limiting the amount of indebtedness of subnational governments. The analysis finds that states with ex-ante higher public debt have stronger economic growth after the implementation of the law, despite reducing public spending and increasing taxes, albeit at the expense of more extreme poverty. The mechanism for this result is a reduction in crowding out. In states with higher ex-ante public debt, banks reallocate credit away from local governments and into private firms, with strong positive firm-level real effects. The unwinding of this crowding out is stronger for more credit constrained firms and for firms borrowing from banks that are more exposed to local public debt. Furthermore, the impact of the law on economic growth is stronger in states allocating a larger share of public spending to non-infrastructure projects.
Banks --- Crowding Out --- Debt Markets --- Emerging Market Economies --- Finance and Financial Sector Development --- Fiscal Policy --- Governance --- Government Lending --- Local Government --- Public Debt --- Public Sector Development --- Subnational Debt
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While reliance on human discretion is a pervasive feature of institutional design, human discretion can also introduce costly noise (Kahneman, Sibony, and Sunstein 2021). We evaluate the consequences, determinants, and trade-offs associated with discretion in high-stake decisions assessing bank safety and soundness. Using detailed data on the supervisory ratings of US banks, we find that professional bank examiners exercise significant personal discretion--their decisions deviate substantially from algorithmic benchmarks and can be predicted by examiner identities, holding bank fundamentals constant. Examiner discretion has a large and persistent causal impact on future bank capitalization and supply of credit, leading to volatility and uncertainty in bank outcomes, and a conservative anticipatory response by banks. We identify a novel source of noise: weights assigned to specific issues. Disagreement in ratings across examiners can be attributed to high average weight (50%) assigned to subjective assessment of banks' management quality, as well as heterogeneity in weights attached to more objective issues such as capital adequacy. Replacing human discretion with a simple algorithm leads to worse predictions of bank health, while moderate limits on discretion can translate to more informative and less noisy predictions.
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