taylor begley | assistant professor of finance
Olin Business School
Washington University in St. Louis
financial intermediation and regulation, mortgage markets, corporate finance, financial contracting, information economics.
Design of Financial Securities: Empirical Evidence From Private-label RMBS Deals. [Review of Financial Studies, 2017]
(with Amiyatosh Purnanandam) [ssrn version]
We study the key drivers of security design in the residential mortgage-backed security (RMBS) market during the run-up to the subprime mortgage crisis. We show that deals with a higher level of equity tranche have a significantly lower delinquency rate that cannot be explained away by the underlying loan pool's observable credit risk factors. The effect is concentrated within pools with a higher likelihood of asymmetric information between deal sponsors and potential buyers of the securities. Further, securities that are sold from high-equity-tranche deals command higher prices conditional on their credit ratings. Overall our results show that the goal of security design in this market was not only to exploit regulatory arbitrage, but also to mitigate information frictions that were pervasive in this market.
We show that banks significantly under-report the risk in their trading book when they have lower equity capital. Specifically, a decrease in a bank's equity capital results in substantially more violations of its self-reported risk levels in the following quarter. The under-reporting is especially high during the critical periods of high systemic risk and for banks with larger trading operations. We exploit a discontinuity in the expected benefit of under-reporting present in Basel regulations to provide further support for a causal link between capital-saving incentives and under-reporting. Overall, we show that banks' self-reported risk measures become least informative precisely when they matter the most.
Color and Credit: Race, Regulation, and the Quality of Financial Services. [Journal of Financial Economics, forthcoming]
(with Amiyatosh Purnanandam)
The incidence of mis-selling, fraud, and poor customer service by retail banks is significantly higher in areas with higher proportions of poor and minority borrowers and in areas where government regulation promotes an increased quantity of lending. Specifically, low-to-moderate-income (LMI) areas targeted by the Community Reinvestment Act have significantly worse outcomes, and this effect is larger for LMI areas with a high-minority population share. The results highlight an unintended adverse consequence of such quantity-focused regulations on the quality of credit to lower-income and minority customers.
Firm Finances and the Spread of COVID-19: Evidence from Nursing Homes.
(with Daniel Weagley)
Residents of senior-care facilities account for over 40% of COVID-19-related deaths in the United States despite making up less than 1% of the population. We show that differences in nursing homes’ finances help explain cross-sectional variation in the incidence of COVID-19. In addition to large drops in revenues, nursing homes were forced to make difficult risk mitigation investment decisions in the face of staggering increases in equipment, testing, and labor costs. We find that nursing homes with less liquidity (pre-pandemic days-cash-on-hand) had a higher likelihood of COVID-19 in their facility. Those with larger negative shocks to cash flow – thus lowering firm value and moving them closer to financial distress – also had a higher likelihood of COVID-19. These results have implications for the role finances can play in the welfare of customers, employees, and for broader public health.
Small bank lending in the era of fintech and shadow banking: a sideshow?
(with Kandarp Srinivasan)
We show that a widespread withdrawal by the four largest U.S banks (Big4) was the primary driver of the steep decline in traditional bank mortgage lending after the crisis. We find that small banks' credit supply was highly responsive to changes in Big4 lending at the county level: their sensitivity was twice (four times) as strong as shadow banks (fintech lenders). As a result, small banks maintained their aggregate market share despite rapid nonbank growth throughout the country. Small banks' relative advantage in balance-sheet lending for loans below the jumbo-conforming size limit is the key driver of our results.
Disaster Lending: "Fair" Prices, but "Unfair" Access. [Revise and Resubmit]
(with Umit Gurun, Amiyatosh Purnanandam, and Daniel Weagley)
We find the Small Business Administration's disaster-relief home loan program denies significantly more loans in areas with larger shares of minorities, subprime borrowers, and higher income inequality. We find that risk-insensitive loan pricing -- a feature present in many regulated and government-run lending programs -- is a primary driver of these disparities in access to credit. We show the differences in denial rates are disproportionately high compared to counterfactual both private-market and government-insured risk-sensitive loan pricing programs. Thus, despite ensuring "fair" prices, the use of risk-insensitive pricing may lead to "unfair" access to credit.
Dream Chasers: The Draw and the Downside of Following House Price Signals
(with Peter Haslag and Daniel Weagley)
We study individual labor market decisions during the house price run-up of the early 2000s using the career paths of nearly 7 million workers. We find that individuals switch careers to become real estate agents (REAs) at higher rates in areas with stronger house price growth, despite little or no growth in average REA wages. We find that those drawn into real estate come from virtually all parts of the skill, wage, and education spectrums, and respond to both fundamental and non-fundamental house price growth. Examining wages, we find that those drawn into REA near the peak of the run-up experienced substantially lower wage paths than similar non-entrants through the end of our sample in 2017. These effects are particularly severe for entrants in areas with higher non-fundamental growth. Overall, we shed light on some important consequences of house price fluctuations, both fundamental and non-fundamental, on labor market outcomes.
The importance of financial experience for first-time homeowners
(with Radhakrishnan Gopalan, Naser Hamdi, and Rodrigo Moser)
We use individual-level data to quantify the effect of getting a mortgage on non-mortgage credit outcomes. We use a regression discontinuity design and find that individuals that transition to homeownership increase their credit card and auto balances by $8,300 and $14,800, suggesting a debt spillover effect from home ownership. This increase in debt is equivalent to 13% of the average mortgage loan, and we provide evidence that it is mainly driven by a change in credit demand. We find that this increase in debt is driven by individuals with higher financial experience, while their overall ability to service their debt remains unchanged. In contrast, low-experience individuals do not increase their debt, but are relatively more likely to experience a deterioration in their financial health. Taken together, these results highlight the role financial experience plays in managing the debt burden associated to a new home.
This paper examines how good borrowers use the design of performance sensitive debt contracts to alleviate financial constraints. I show that borrowers use a convex pricing grid (i.e., a contract where the increase in the loan spread following a decline in performance exceeds the decrease in the spread following a performance improvement) to signal their unobservable creditworthiness and receive better bank loan terms. I find that constrained firms that use convex pricing grids receive loans that are 21-28% larger with a spread that is 31-37 basis points lower than observationally similar borrowers that use fixed spread loans. Consistent with the notion that a costly signal should positively correlate with future financial health, I find that constrained borrowers that use a loan with a convex pricing grid are one third less likely to experience financial distress during the term of their loans.