The Federal Reserve and market confidence

We discover a novel monetary policy shock that has a widespread impact on aggregate financial conditions. Our shock can be summarized by the response of long-horizon yields to Federal Open Market Committee (FOMC) announcements; not only is it orthogonal to changes in the near-term path of policy rates, but it also explains more than half of the abnormal variation in the yield curve on announcement days. We find that our long-rate shock is positively related to changes in real interest rates and market volatility, and negatively related to market returns and mortgage demand, consistent with policy announcements affecting market confidence. Our results demonstrate that Federal Reserve pronouncements influence markets independent of changes in the stance of conventional monetary policy

Bank Heterogeneity and Capital Allocation: Evidence from 'Fracking' Shocks

This paper empirically investigates banks' investment allocations over the recent business cycle. I identify unsolicited deposit shocks resulting from unconventional energy development and estimate bank allocations of these deposits. In the pre-recession period, banks lend 38 percent of incremental deposits; however, during the downturn, banks favor liquid assets and lending allocations fall to 22 percent. Banks with low risk tolerance or less access to liquidity are particularly sensitive to the decline in economic conditions, choosing securities and cash, respectively. The findings identify significant heterogeneity in the willingness of banks to allocate capital during adverse times

Does CFPB Oversight Crimp Credit?

We study the effects of regulatory oversight by the Consumer Financial Protection Bureau (CFPB) on credit supply as well as bank risk-taking, growth, and operating costs. We use a difference-in-differences approach, making use of the fact that banks below a $10 billion size cutoff are exempt from CFPB supervision and enforcement activities. We find little evidence that CFPB oversight significantly reduces the overall volume of mortgage lending. However, we find some evidence of changes in the composition of lending-CFPB-supervised banks originated fewer loans to risky borrowers, offset by an increase in large "jumbo" mortgages. We find no clear evidence of substitution in lending between bank and nonbank subsidiaries, or effects on asset growth or bank noninterest expenses

Does the Community Reinvestment Act Improve consumers' access to credit?

We study the impact of the Community Reinvestment Act (CRA) on access to consumer credit since 1999 using an individual-level panel and three distinct identification strategies: a regression discontinuity design centered on a CRA-eligibility cutoff; a comparison of neighboring census blocks; and an event study of changes in eligibility. All three rule out a significant effect of the CRA on consumer borrowing. We show that this is in part explained by a shift in mortgages from nonbanks, which are free from CRA obligations, to banks in need of CRA-eligible mortgages. Our findings underscore the pitfalls of a circumscribed regulatory regime

Macroprudential policy and the revolving door of risk: Lessons from leveraged lending guidance

We investigate the U.S. experience with macroprudential policies by studying the interagency guidance on leveraged lending. We find that the guidance primarily impacted large, closely supervised banks, but only after supervisors issued important clarifications. It also triggered a migration of leveraged lending to nonbanks. While we do not find that nonbanks had more lax lending policies than banks, we unveil important evidence that nonbanks increased bank borrowing following the issuance of guidance, possibly to finance their growing leveraged lending. The guidance was effective at reducing banks' leveraged lending activity, but it is less clear whether it accomplished its broader goal of reducing the risk that these loans pose for the stability of the financial system. Our findings highlight the importance of supervisory monitoring for macroprudential policy goals, and the challenge that the revolving door of risk poses to the effectiveness of macroprudential regulations

Import Competition and Household Debt

We analyze the effect of import competition on household balance sheets from 2000 to 2007 using individual data on consumer finances. We exploit variation in exposure to foreign competition using industry-level shipping costs and initial differences in regions' industry specialization. We show that household debt increased significantly in regions where manufacturing industries are more exposed to import competition. A one standard deviation increase in exposure to import competition explains 30 percent of the cross-regional variation in household leverage growth, and is mostly driven by home equity extraction. Our results highlight the distributive effects of globalization and their consequences for household finances