Foreclosures and Neighborhoods: The Shape and Impacts of the U.S. Mortgage Crisis

The U.S. mortgage crisis beginning in 2007 resulted in very high levels of foreclosures in many neighborhoods around the country. In addition to harming individual households, foreclosures had negative spillover effects on nearby properties and households, including lower property values and higher crime rates. To understand the effects of foreclosures on households and neighborhoods, it is important first to understand the demographic and geographic distributions of foreclosures and how they may have changed during the foreclosure crisis, which persisted for more than five years, from 2007 to beyond 2012. Spurred in part by the crisis, dozens of studies have been published on the effects of foreclosures on neighborhoods; somewhat fewer studies have systematically examined the intrametropolitan morphology of the crisis, including how this morphology varied across metropolitan areas and over time. This chapter first reviews the geographic incidence and concentrations of foreclosures, and then reviews evidence of the impacts of foreclosures on households and neighborhoods

Political economy of the US financial crisis 2007-2009

The emphasis of this paper is on the political economy of the subprime mortgage crisis in the United States and how the policy makers contributed to it through their legislation and regulations, made under the rising influence of interest groups and the lobbying activities of the finance industry. The “Great Recession” of 2007-2009 began as a bubble-burst in the mortgage market in the United States that spilled over to the entire financial market of the US, and afterwards to the integrated world financial market. The crisis sprang up over the US real sector and, due to the decline in US aggregate demand, spread consequently to the real economy of the rest of the World. No sound evidence has been given for the publicly proclaimed idea that the causes of the crisis lie within the self-regulating free market. The causes of the crisis lie primarily in the activities of political power, i.e. in the extensive government regulation which has, under the strong influence of interest groups and the lobbying power of financial corporations, led to favouritism in macroeconomic policies and inefficient resource allocation. Regulation was enforced by stimulating affordable housing through government sponsored enterprises, oligopoly of the rating agencies, banking regulation and an increasing connection between government and the finance industry.United States financial crisis, political economy, government regulation, lobbying, political power

Sociological institutionalist approach on banks’ lending behavior in Myanmar (Burma)

A thesis submitted to the University of Bedfordshire in partial fulfilment of the requirements for the degree of Doctor of PhilosophyThis is an exploratory study which investigated the process by which banks' lending behaviour in Myanmar (Burma) was influenced by the institutional environment and their responses towards them. The theoretical framework used in this study was primarily drawn upon Scott's new institutional theory. Since the theory focused on the convergent perspective rather than divergent perspective, the theory of Oliver's strategic responses to these institutional pressures, coercive, normative and mimetic, was incorporated in the theoretical framework development. The main method of data collection was interviews. NVIVO was used to analyse these interviewed data. However, descriptive statistics were also used to provide a comprehensive picture of the context being studied. The findings suggest that banks' always attempted to extemalise risks to borrowers. Their responses to institutional pressures were to conform but a range of other forms of resistance were also found. However, strong forms of resistance were uncommon. I have also identified the situations in which the banks would choose either strong or weak forms of resistance to institutional pressures. Such identifications may add understanding to the specific lending strategies that are developed in different circumstances. The study also contributed to closing the gap in banking literature through conducting research in the context of Myanmar, which was previously unexplored. In addition, it suggests areas needed to be improved for financial sector development in Myanmar

Is the credit worth it? For-profit lenders in microfinance with rational and behavioral borrowers

The bulk of the literature on microcredit has focused on either not‐for‐profit lenders or assumes a perfectly competitive, zero‐profit market equilibrium. Yet the market has experienced a significant shift toward for‐profit lending and the assumptions of perfect competition are likely to be too strong in many locations. We review the state of the literature on for‐profit lending in microcredit, consider its implications for both conventionally ‘rational’ borrowers and for borrowers with behavioral biases, and point out directions for future research

Financial Inclusion and Natural Disasters

This dissertation explores the implications of natural disaster risk for access to financial services, especially credit. Its results show that disasters can dramatically undermine the ability of financial intermediaries (FIs) to lend after an event, increasing the cost of the disaster and delaying recovery. Moreover, the risk of natural disasters discourages investment in vulnerable regions and economic sectors and so slows economic development. Financial risk transfer mechanisms such as insurance can help maintain lending following an event. While many international development projects have targeted disaster insurance markets to households, managing disaster-related credit risk may be done more effectively through insurance products for FIs. Additionally, prudential supervision and the credit risk rating methods of investors in developing and emerging economies are dominated by developed country standards that overlook natural disaster risks. Public and private interests align in the need to tailor such standards and so enhance the effectiveness with which vulnerable FIs manage disaster risk

Behavioral microfoundations of retail credit markets :a theoretical and experimental approximation

[Resumen] La reciente crisis financiera ha renovado el interés en el papel que juega el crédito, particularmente bancario, para amplificar el ciclo económico. Esta tesis se centra en el lado de la oferta para estudiar la eficiencia informativa de los sistemas bancarios a la hora de conceder crédito a la economía. Tras una revisión de la literatura centrada en dicho objeto, establecemos la economía y finanzas conductuales como marco conceptual de nuestra investigación. Asi, comentamos en primer lugar los límites para aplicar la hipótesis del mercado eficiente, paradigma clásico en los mercados financieros, a los sistemas bancarios, y ofrecemos un enfoque alternativo en tres pasos que se basa en la literatura conductual. Después, llevamos a cabo una investigación experimental para testar el primer paso: un juego de simulación diseñado para replicar el esquema básico en el que un banco establece sus políticas de crédito. Los resultados se contrastan con los perfiles de los participantes en términos de exceso de confianza y la teoría prospectiva, para determinar si estos sesgos podrían explicar las diferentes políticas de crédito. Por último, ofrecemos un modelo teórico para analizar los pasos segundo y tercero. Asumiendo que algunos bancos tienen gerentes demasiado optimistas, el modelo muestra cómo los bancos racionales seguirían a sus competidores sesgados, y describe los límites del arbitraje en la industria que impedirían restaurar la eficiencia informativa.[Resumo]A recente crise financeira renovou o interese no papel xogado polo crédito, en particular bancario, na amplificación do ciclo económico. Esta tese céntrase no lado da oferta ao obxecto de estudar a eficiencia informativa dos sistemas bancarios cando conceden crédito á economía. Tras unha revisión das principais áreas da literatura centradas en dita cuestión, fixamos a economía e finanzas conductuais como marco conceptual da nosa investigación. Deste xeito, debatemos primeiro sobre as limitacións para aplicar a hipótese do mercado eficiente, paradigma clásico nos mercados financeiros, aos sistemas bancarios, e suxerimos un enfoque alternativo en tres pasos, baseado na literatura conductual. Logo, poñemos en práctica unha investigación experimental ao obxecto de testar o primeiro paso: un xogo de simulación deseñado para replicar o esquema básico no que un banco establece as súas políticas de crédito. Os resultados son contrastados cós perfís dos participantes en termos de exceso de confianza e a teoría prospectiva, para determinar se ditos sesgos poderían explicar diferentes políticas de crédito entre bancos. Para rematar, ofertamos un modelo teórico para analizar o segundo e terceiro paso. Asumindo que algúns bancos son dirixidos por xestores optimistas de máis, o modelo mostra como os bancos racionais seguirían aos seus sesgados competidores, e describe os límites da arbitraxe na industria que impedirían restablecer a eficiencia informativa.[Abstract] The recent financial crisis has renewed interest in the role credit plays, particularly when granted by the banking sector, to amplify the economic cycle. This thesis focuses on the credit supply side to study the informational efficiency of bank-based financial systems when granting credit to the economy. After a revision of the main areas of the literature that are devoted to such purpose, we set the behavioral economics and finance as a conceptual framework for our research. Thus, we firstly discuss the limits to apply the classic paradigm in financial markets, the efficient market hypothesis, to bank-based systems, and offer an alternative approach in three steps, based on the behavioral literature. Then, we implement an experimental research to test the first step. The experiment consists of a business simulation game designed to replicate the basics of a bank to set its credit policies. The results are tested against the participants’ profiles in terms of overconfidence and prospect theory, to determine whether these behavioral biases might explain different credit policies across banks. Finally, we offer a theoretical model to analyze the second and third steps in the behavioral approach. Assuming some banks are run by too optimistic managers, the model shows how rational banks would herd to follow their biased competitors, and describes the limits of arbitrage in the industry that would prevent informational efficiency to be restored

Monetary policy and systemic risk on financial markets : concepts, transmission channels and policy implications

The present thesis explores the issue of systemic risk on financial markets and its interplay with monetary policy. Systemic risk is defined as the risk of experiencing a severe financial crisis. It is inefficiently high in the absence of appropriate regulation due to the presence of systemic externalities, which arise if financial institutions do not internalize the consequences of their actions for systemic stability. More specifically, such behavior may lead to vulnerable financial networks, poor diversification, fire sales, inefficient distribution of liquidity as well as to breakdowns of markets characterized by incomplete information. Macroprudential regulation aiming at systemic stability should therefore focus on the mitigation of systemic externalities. However, a critical assessment of the current state of financial regulation reveals that several important drivers of systemic risk remain unaddressed. Insufficient containment of systemic risk poses a challenge for monetary policy. First, financial crises have adverse effects on macroeconomic stability. Second, monetary policy itself has the potential to affect the evolution of systemic risk. It is subsequently tried to shed light on potential transmission channels running from an expansive policy stance to an increase in systemic risk. On a theoretical basis, it is found that a monetary expansion tends to induce higher leverage as well as credit risk and less stable refinancing in the intermediation sector. An empirical analysis of the US economy based on vector autoregressions supports this risk-taking channel. Moreover, the analysis of a simple macro-financial model shows that procyclical risk-taking behavior of financial intermediaries produces additional macroeconomic volatility. Optimal policy consists of a combination of strict capital requirements and an interest rate rule featuring an explicit reaction to credit dynamics. In a final step, I discuss implications for monetary policy. If macroprudential regulation is not strict enough, it is advisable to embark on a strategy of preemptive interest rate hikes in an environment of rising systemic risk. Its implementation could be achieved by a slight modification of the existing two-pillar strategy of the European Central Bank. Alternatively, central banks could rely on output gap measures which take financial conditions into account. However, such a strategy can increase short-term macroeconomic volatility. Hence, monetary policy faces the additional trade-off of balancing medium-term financial stability against macroeconomic stability in the short run. Moreover, monetary policy and macroprudential regulation should be carefully coordinated to deliver welfare-maximizing outcomes.Die vorliegende Arbeit beleuchtet das Phänomen von systemischem Risiko auf Finanzmärkten sowie dessen Zusammenhänge mit der Geldpolitik. Systemisches Risiko wird als das Risiko des Eintritts einer schweren Finanzkrise definiert. Bei ausbleibender Regulierung ist das systemische Risiko ineffizient hoch. Dies ist auf systemische Externalitäten zurück zu führen. Diese treten auf, wenn Finanzmarktteilnehmer die Konsequenzen ihrer individuellen Entscheidungen für die Systemstabilität nicht berücksichtigen. Dieses Verhalten führt unter Umständen zur Ausbildung fragiler Forderungsnetzwerke, zu ungenügender Diversifikation, zu ungeordneten Notverkäufen von Wertpapieren, zu einer ineffizienten Verteilung von Liquidtät sowie zum Zusammenbruch von Märkten welche durch asymmetrische Information gekennzeichnet sind. Eine auf Systemstabilität bedachte makroprudenzielle Regulierung sollte daher die Korrektur dieser Externalitäten anstreben. Eine kritische Betrachtung des aktuellen Regulierungsrahmens zeigt jedoch, dass mehrere wichtige Treiber von systemischem Risiko nach wie vor nicht adäquat adressiert werden. Eine ungenügende Begrenzung des systemischen Risikos stellt für die Geldpolitik eine Herausforderung dar. Zum einen gefährden Finanzkrisen die makroökonomische Stabilität, zum anderen wird das systemische Risiko möglicherweise durch die Geldpolitik beeinflusst. Folgend wird versucht, mögliche Transmissionskanäle von einem expansiven geldpolitischen Kurs hin zu erhöhtem systemischem Risiko darzustellen. Auf modelltheoretischer Ebene wird gezeigt, dass expansive Geldpolitik tendenziell zu erhöhter Verschuldung, einer Zunahme des Kreditrisikos sowie zu einer fragileren Refinanzierung im Intermediationssektor führt. Eine empirische Untersuchung für die amerikanische Volkswirtschaft auf Basis einer Vektorautoregressionsanalyse liefert deutliche Anzeichen für das Vorliegen eines derartigen Risikoneigungskanals. Zudem zeigt die Analyse eines simplen Macro-Finance Modells, dass das prozyklische Risikoverhalten von Finanzintermediären zusätzliche makroökonomische Schwankungen produziert. Die optimale Politikreaktion besteht aus rigiden Eigenkapitalvorschriften sowie einer geldpolitischen Zinsregel mit einer expliziten Reaktion auf Kreditdynamiken. Zuletzt werden geldpolitische Implikationen diskutiert. Falls die makroprudenzielle Regulierung nicht rigide genug ist, sollte die Geldpolitik in einem Umfeld von ansteigendem systemischem Risiko präventiv die Zinsen erhöhen. Die Implementierung dieser Strategie könnte mithilfe einer geringfügigen Modifikation der bestehenden Zwei-Säulen Strategie der Europäischen Zentralbank erfolgen. Alternativ könnten Zentralbanken Messgrößen für die Outputlücke verwenden, welche den Zustand des Finanzmarkts berücksichtigen. Jedoch kann solch eine Strategie die kurzfristige Makrovolatilität erhöhen. Daher ergibt sich für die Geldpolitik ein zusätzlicher Zielkonflikt zwischen mittelfristiger Finanzstabilität und der makroökonomischen Stabilität in der kurzen Frist. Zudem sollten Geldpolitik und makroprudenzielle Regulierung sorgfältig koordiniert werden, um wohlfahrtsoptimale Ergebnisse zu erzielen