Buy a home or rent? A better way to choose

Knowing whether buying a home is a better financial move for a family than renting requires a consideration of costs and options that people often neglect to factor in. One aspect of the calculation that is almost always overlooked is uncertainty—the fact that no matter how good one’s estimates of the future are, the future can turn out differently than projected. Incorporating uncertainty into the rent-or-buy calculation gives potential homebuyers information that can improve their decisions. While incorporating uncertainty is complicated, it’s made easier with the Cleveland Fed’s online calculator.Households - Finance ; Home ownership ; Rental housing

Effective practices in crisis resolution and the case of Sweden

The current financial crisis is a painful reminder that the developed world is not yet immune to these devastating shocks. But while we haven’t learned to prevent them, we have learned some lessons about what is necessary to contain them once they begin and to limit the damage that follows. As policymakers worldwide focus on resolving the current financial crisis, they might look to Sweden as a useful model for effective strategies.Financial crises - Sweden

Market- vs. bank-based financial systems: do investor rights really matter?

Why are common-law countries market-dominated and civil-law countries bank-dominated when either financial structure can promote economic growth? This paper provides an explanation tied to legal traditions. Civil-law courts have been less effective in resolving conflicts than common-law courts because civil-law judges traditionally refrain from interpreting the codes and creating new rules. Banks can induce borrowers to honor their obligations by threatening to withhold services that only banks can provide.Comparative law ; Financial markets

Relationship loans and information exploitability in a competitive market: loan commitments vs. spot loans

Despite the numerous benefits of loan commitments, only 79% of the commercial and industrial loans are made under commitment. I show that two factors limit the use of loan commitments. First, because banks commit themselves to lend, they carry costly liquidity reserves to meet their obligations. Due to liquidity costs, the interest rate on commitment loans is high relative to spot loans. Second, high interest rates trigger moral hazard. If the bank expects a profitable relationship in the future, it can absorb a portion of the liquidity costs to reduce the interest rate and attenuate moral hazard. If not, the borrower cannot get a loan commitment.Bank loans

Essays on relationship -oriented bank lending arrangements.

This dissertation consists of three essays on bank loan commitments. The first essay is an in-depth review of the loan commitment literature. The other two essays shed light on the following stylized facts about loan commitments. First, since the early 1980s, the courts have often obstructed the bank's right to deny credit to a loan commitment owner by invoking the Material Adverse Change (MAC) clause, arguing that the bank did not act in good faith. What is surprising is that the existing literature suggests that the MAC clause has economic value. So, the courts' behavior in invalidating the MAC clause has remained a puzzle. Second, the Federal Reserve's Senior Loan Officer Survey (1988) shows that borrowers view the guarantee against being rationed that is provided by a loan commitment as the most important reason for buying loan commitments. The current literature does not explain the existence of loan commitments based on the borrower's need for insurance against credit rationing. Third, although a large percentage of short-term C&I lending is done under loan commitments, for loans with short repricing intervals, this percentage is significantly small. Finally, borrowers are using a declining fraction of their available credit lines, while the commitment demand, expressed as a percentage of total bank lending, is stable. In the third chapter, I develop an economic model of economically rational litigation to explain why the courts have been intervening to enforce loan commitment contracts that are discretionary. I show that agents with contracting discretion will sometimes use the discretion in a manner that violates the spirit of the contract. That is, there is a non-zero probability that the seller of the discretionary contract will use the discretion not to recalibrate its obligation under the contract due to arrival of new information, but to merely exploit this discretion for personal gain. If the probability of such abuse becomes sufficiently large, courts annul discretionary clauses and make discretionary contracts enforceable ex post. In the fourth chapter, I model the tension between the protection-against-credit-rationing guarantee of a loan commitment and the cost to the bank of carrying the liquidity reserves needed to meet its (future) contractual commitment. This allows me to explain the last three stylized facts about this market.Ph.D.BankingFinanceSocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/132565/2/9977152.pd