Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractIn this paper, we provide an overview of the subprime mortgage securitization process and the seven key informational frictions that arise. We discuss the ways that market participants work to minimize these frictions and speculate on how this process broke down. We continue with a complete picture of the subprime borrower and the subprime loan, discussing both predatory borrowing and predatory lending. We present the key structural features of a typical subprime securitization, document how rating agencies assign credit ratings to mortgage-backed securities, and outline how these agencies monitor the performance of mortgage pools over time. i Executive SummarySection numbers containing more detail are provided in [square] brackets.• Until very recently, the origination of mortgages and issuance of mortgage-backed securities (MBS) was dominated by loans to prime borrowers conforming to underwriting standards set by the Government Sponsored Agencies (GSEs) [2] − By 2006, non-agency origination of $1.480 trillion was more than 45% larger than agency origination, and non-agency issuance of $1.033 trillion was 14% larger than agency issuance of $905 billion.• The securitization process is subject to seven key frictions. The arranger has more information about the quality of the mortgage loans which creates an adverse selection problem: the arranger can securitize bad loans (the lemons) and keep the good ones. This third friction in the securitization of subprime loans affects the relationship that the arranger has with the warehouse lender, the credit rating agency (CRA), and the asset manager. Resolution: haircuts on the collateral imposed by the warehouse lender. Due diligence conducted by the portfolio manager on the arranger and originator. CRAs have access to some private information; they have a franchise value to protect. 4) Frictions between the servicer and the mortgagor: Moral hazard [2. 1.4] In order to maintain the value of the underlying asset (the house), the mortgagor (borrower) has to pay insurance and taxes on and generally maintain the property.In the approach to and during delinquency, the mortgagor has little incentive to do all that. Resolution: Require the mortgagor to regularly escrow funds for both insurance and property taxes. When the borrower fails to advance these funds, the servicer is typically required to make these payments on behalf of the investor. However, limited effort on ...

Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use:Documents in EconStor may be saved and copied for your personal and scholarly purposes.You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public.If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence.

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There have been many claims that credit derivatives like credit default swaps (CDS) have lowered the cost of debt financing to firms by creating new hedging opportunities and information for investors. However, these instruments also give banks an opaque means through which to sever links to their borrowers, reducing lender incentives to screen and monitor. In this paper, we evaluate the impact that the onset of CDS trading has on the spreads that underlying firms pay at issue in order to raise funding in the corporate bond and syndicated loan markets. Employing matched-sample methods, we fail to find evidence that the onset of CDS trading affects the cost of debt financing for the average borrower. However, we do uncover economically significant adverse effects on risky and informationally-opaque firms. It appears that the onset of CDS trading reduces the importance of the lead bank's retained share in resolving any asymmetric information problems that exist between the lead bank and the participants in a loan syndicate. On a positive note, we do find a small positive impact of CDS trading on spreads at issue for transparent and safe firms, where the lead bank's share is much less important. Moreover, we document that the benefit of CDS trading on spreads increases once the market becomes sufficiently liquid. In the end, this financial innovations has increased the completeness of markets, but at the same time has created new problems by reducing the effectiveness of lead banks' loan shares as a monitoring commitment device.

This paper shows how the intraday allocation and pricing of overnight loans of federal funds reflect the decentralized interbank market in which these loans are traded. A would-be borrower or lender typically finds a counterparty institution by direct bilateral contact. Once in contact, the two counterparties to a potential trade negotiate terms that reflect their incentives for borrowing or lending, as well as the attractiveness of their respective options to forego a trade and to continue "shopping around." This over-the-counter (OTC) pricing and allocation mechanism is quite distinct from that of most centralized markets, such as an electronic limit order book market in which every order is anonymously exposed to every other order with a centralized order-crossing algorithm.While there is a significant body of research on the microstructure of specialist and limit order book markets, most OTC markets do not have comprehensive transaction-level data available for analysis. The federal funds market is a rare exception. We go beyond a previous study of the microstructure of the federal funds market (Craig H. Furfine 1999) by modeling how the likelihood of matching a particular borrower with a particular lender, as well as the interest rate that they negotiate, depend on their respective incentives to add or reduce balances and their ability to conduct further trading with other counterparties (proxied by the level of their past trading volumes). Our results are consistent with the thrust of search-based OTC financial The rate that a borrower or lender bank negotiates on a loan is less attractive than current average rates negotiated in the market if the bank has more to gain from trade than its counterparty, and if the bank is less active in the market, after controlling for prior trading relationships. We offer alternative search-based explanations, going beyond credit risk variation.More generally, we show how the likelihood that some bank i borrows from some other bank j during a particular minute t of a business day, and how the interest rate negotiated on the loan, depend on: the prior trading relationship between these two banks; the extent to which their balances at the beginning of minute t are above or below their normal respective balances for that time of day, their overall levels of trading activities, the amount of time left until their end-of-day balances are monitored for reserverequirement purposes, and the volatility of the federal funds rate in the trailing 30 minutes.

The response of aggregate lending to monetary policy is stronger in state banking markets where financially constrained banks have more market share. On the other hand, there is little difference in the response of state output across the market share financially constrained banks, implying that the aggregate elasticity of output to bank lending is very small, if not zero. I conclude that while small firms might view bank loans as special, they are not special enough for the lending channel to be an important part of how monetary policy works.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in this paper are those of the authors and are not necessarily reflective of views the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors. Terms of use: Documents in EconStor may MBS Ratings and the Mortgage Credit BoomAdam Ashcraft, Paul and James Vickery Federal Reserve Bank of New York Staff Reports, no. 449 May 2010 JEL classification: G01, G21, G24 AbstractWe study credit ratings on subprime and Alt-A mortgage-backed-securities (MBS) deals issued between 2001 and 2007, the period leading up to the subprime crisis. The fraction of highly rated securities in each deal is decreasing in mortgage credit risk (measured either ex ante or ex post), suggesting that ratings contain useful information for investors. However, we also find evidence of significant time variation in risk-adjusted credit ratings, including a progressive decline in standards around the MBS market peak between the start of 2005 and mid-2007. Conditional on initial ratings, we observe underperformance (high mortgage defaults and losses and large rating downgrades) among deals with observably higher risk mortgages based on a simple ex ante model and deals with a high fraction of opaque lowdocumentation loans. These findings hold over the entire sample period, not just for deal cohorts most affected by the crisis.Key words: credit rating agencies, mortgages, mortgage-backed securities, subprime crisis Critics interpret these facts as evidence of important flaws in the credit rating process, either due to incentive problems associated with the "issuer-pays" rating model, or simply insufficient diligence or competence (e.g. US Senate, 2010;White, 2009; Fons, 2008). 1 In their defense however, rating agencies argue that recent MBS performance primarily reflects a set of large, unexpected shocks, including an unprecedented decline in home prices, and a financial crisis, events which surprised most market participants. CRAs also point to warnings made by them before the crisis about increasing risk amongst subprime MBS, and argue that ratings became accordingly more conservative to reflect this greater risk. Our main unit of analysis is an MBS deal, which is a set of structured bonds linked to a common pool (or pools) of mortgages. Rat...

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThe FDIC used cross-guarantees to close thirty-eight subsidiaries of First RepublicBank Corporation in 1988 and eighteen subsidiaries of First City Bancorporation in 1992 when lead banks from each of these Texas-based bank holding companies were declared insolvent. I use this exogenous failure of otherwise healthy subsidiary banks as a natural experiment for studying the impact of bank failure on local-area real economic activity. I find that the closings of the subsidiaries were associated with a significant decline in bank lending that led to a permanent reduction in real county income of about 3 percent.