Subprime Mortgages, Market Impact, and Safety Nets

The main purpose of this paper is to investigate the aggregate data about bank loans which may hide significant information about the monetary transmission mechanism. This study, by disaggregating bank loans data and using the relevant interest rates in Sweden, investigates the behaviour of banks after a monetary policy tightening. By using an unrestricted VAR model and impulse response analysis, our results show that a shock on the policy rate affects the main components of the banks' loan portfolios differently. Initially, banks do not reduce lending to firms and households and they present a sluggish reaction concerning the relevant interest rates. On the contrary, they reduce lending to mortgage credit institutions significantly since real estate lending can be considered as a risky long-term investment. Moreover mortgage credit institutions reduce lending for housing purposes to non-bank public. This reduction is mainly driven by flexible rate loans and loans secured on tenant owned apartments. Consequently, theses actions have a significant effect on real economic activity, by amplifying the initial shock from the tightening monetary policy. The latter result provides evidence of the bank lending channel in Sweden working via mortgage lending and could be very important for policy makers.

Section: Discussionmentioning

confidence: 99%

Banks’ lending behavior and monetary policy: evidence from Sweden

Papadamou

Siriopoulos

2010

“…Their findings provide evidence on earnings management by the financial institutions in the post-financial crisis period. Other studies such as Watson (2008) and Suetorsak (2006) and also examine change in banks behavior during periods of financial. We extend the existing research by evaluating the impact of bank size and riskiness of asset portfolios on the association between LLP and management of reported earnings and capital ratios and also evaluate the effect of SFAS 114 and financial crisis on these relationships.…”

Section: Introductionmentioning

confidence: 99%

Earnings versus capital ratios management: role of bank types and SFAS 114

Alali

Jaggi

2010

“…2015; Krainer and Laderman 2014), 9 imposed looser covenants on borrowers of securitized loans (Wang and Xia 2014), and misreported the value of securitized assets (Griffin and Maturana 2016;Piskorski et al 2015). 10 As a result, many MBS investors suffered extensive losses during the crisis (Watson, 2008). 11 Due to significant information asymmetries in the securitization markets, investors were not equipped with the necessary tools to identify opportunistic behaviour by banks and assess collateral quality, so they tended to rely on rating agencies.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

Do investors value frequent issuers in securitization?

Deku

Kara

Karimov

2021

We assess the value of frequent issuers to investors in securitization markets by examining the initial yield spread of 6132 European mortgage-backed securities (MBS), covering a 20-year period between 1999 and 2018. We find that frequent issuers have certification value, and it increases as the credit cycle approaches its peak, as lending standards loosen, and information asymmetries in securitization markets increase. Investors value frequent issuers more favourably on riskier, difficult to evaluate MBS. We find that after the great financial crisis (GFC), investors began to attribute more value to frequent issuers, regardless of MBS credit quality. We also find that in the pre-crisis period, investors required higher yields to compensate for perceived rating shopping, which is not observed after the GFC. Finally, we show that investors expect higher yields on deals closed by subsidiaries of foreign banks.