Betcha can’t acquire just one: merger programs and compensation

This paper examines the evolution of merger programs, that is, repeated acquisitions by the same firm. Most acquisitions are made by firms with merger programs. Acquisitions that are part of programs are different from one-off acquisitions both in the effect on CEO compensation and in the reaction of the stock market. CEO compensation rises more after growth from program acquisitions than after internal growth or growth from one-off acquisitions. During a merger program, the increase in CEO compensation is much larger when the acquirer’s stock price is increasing than at other times. This is not true for other types of growth. Merger programs also show a distinct evolution. Initially, program mergers are received better by the stock market than are one- off mergers. ; As a program progresses, however, the acquisitions tend to have lower announcement reactions and long-run returns. In addition, the effect on CEO compensation is smaller for mergers later in a program. There is evidence that some firms are predisposed to make acquisitions. Firms that have made acquisitions in the recent past and that already pay their CEOs well are more likely to make future acquisitions. This suggests that there may be a managerial motivation for merger programs: firms where CEOs can expect to get large compensation increases from acquisitions are more likely to have merger programs.Bank mergers ; Bank management

Competition in mortgage markets: the effect of lender type on loan characteristics

This article examines how competition among lenders affects mortgage loan characteristics. The author finds that, on average, banks issue safer mortgages than independent mortgage banks. Further, mortgages from banks with a branch in the local market where the property is tend to be safer than mortgages from banks without a local branch. Changes in market shares among lender types (local bank, nonlocal bank, or independent mortgage bank) that lead to higher loan risk also are associated with better borrower quality. Increasing the local market share of a lender type raises loan risk and borrower quality at that lender type.Mortgage loans ; Mortgages ; Home Mortgage Disclosure Act

The role of securitization in mortgage lending

Recent media coverage on the problems in the subprime mortgage market has featured an alphabet soup of abbreviations, such as MBS, CDO, and SIV. What do these terms stand for? And how do they fit into the mortgage financing process?Mortgage loans ; Mortgage-backed securities

The role of lenders in the home price boom

This paper examines the relationship between real estate prices during the home price boom from the late 1990s into 2005 and competition among mortgage lenders. The mortgage lending business, especially with the rise of the originate-to-distribute model, had competitors with very different non- mortgage activities and regulation. I show that in local markets, when banks increased their share of mortgages relative to lenders such as mortgage brokers, home prices started increasing at a faster pace. Home prices also affected market shares, but primarily through changes at the national level. When national home prices increased at a faster pace, there was a shift from banks to mortgage brokers in local markets.Mortgage loans

Switching primary federal regulators: is it beneficial for U.S. banks?

Banks and banking ; Bank examination

Too much right can make a wrong: Setting the stage for the financial crisis

The financial crisis that started in 2007 exposed a number of flaws in the financial system. Many of these flaws were associated with financial instruments that were issued by the shadow banking system, especially securitized assets. The volume and complexity of securitized assets grew rapidly during runup to the financial crisis that began in 2007. The paper discusses how the financial crisis can be viewed as a possible but logical outcome of a system where investors are overconfident, busy, and investing other peoples’ money and intermediaries are set up to take advantage of investors’ tendencies. The investor-intermediary risk cycle in this crisis is common to other crises. However, there are a number of factors that may have made the 2007 crisis more severe. Among them are the length of the pre-crisis period, the shift from financial intermediaries to the shadow banking system, the increasing interconnectedness among financial firms, and the increased leverage at some financial firms.Financial crises

Competition in mortgage markets: the effect of lender type on loan characteristics

This article examines how competition among lenders affects mortgage loan characteristics. The author finds that, on average, banks issue safer mortgages than independent mortgage banks. Further, mortgages from banks with a branch in the local market where the property is tend to be safer than mortgages from banks without a local branch. Changes in market shares among lender types (local bank, nonlocal bank, or independent mortgage bank) that lead to higher loan risk also are associated with better borrower quality. Increasing the local market share of a lender type raises loan risk and borrower quality at that lender type.

Banking market conditions and deposit interest rates

This paper addresses the impact market conditions on bank deposit interest rates. Examining data for 1988-2000, we find that rates are affected by market size structure (defined as the distribution of market shares of banks of different sizes whether or not the market share is achieved entirely in that local market). This is in addition to the effects of market concentration noted in earlier work. We also find large differences between urban and rural markets. In rural areas, changes in market concentration have no effect on deposit rates. These findings have implications for antitrust policy in banking.Bank deposits ; Interest rates

Explaining recent changes in home prices

The increase in housing prices in the past ten years can largely be explained by falling mortgage interest rates and changes in household income. This article offers some projections of what might happen to housing prices if mortgage rates increase.Housing - Prices ; Mortgages

How the credit channel works: differentiating the bank lending channel and the balance sheet channel

The credit channel of monetary policy transmission operates through changes in lending. To examine this channel, we explore how movements in the real federal funds rate affect bank lending. Using data on individual loans from the Survey of Terms of Bank Lending, we are able to differentiate two ways the credit channel can work: by affecting overall bank lending (the bank lending channel) and by affecting the allocation of loans (the balance sheet channel). We find evidence consistent with the operation of both internal credit channels. During periods of tight monetary policy, banks adjust their stock of loans by reducing the maturity of loan originations and they reallocate their short-term loan supply from small firms to large firms. These results are stronger for large banks than for small banks.Monetary policy ; Bank loans