Tracing Out Capital Flows: How Financially Integrated Banks Respond to Natural Disasters (with Philip E. Strahan)

Journal of Financial Economics, vol. 125, no.1 (July 2017):182-199. 

Multi-market banks reallocate capital when local credit demand increases after natural disasters. Following such events, credit in unaffected but connected markets declines by about 50 cents per dollar of additional lending in shocked areas, but most of the decline comes from loans in areas where banks do not own branches. Moreover, banks increase sales of more-liquid loans in order to lessen the impact of the demand shock on credit supply. Larger, multi-market banks appear better able than smaller ones to shield credit supplied to their core markets (those with branches) by aggressively cutting back lending outside those markets.

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Clouded Judgment: The Role of Sentiment in Credit Origination (with Ran Duchin and Denis Sosyura)

Journal of Financial Economics, vol. 121, no. 2 (August 2016): 392–413.  

Using daily fluctuations in local sunshine as an instrument for sentiment, we study its effect on day-to-day decisions of lower-level financial officers. Positive sentiment is associated with higher credit approvals, and negative sentiment has the opposite effect of a larger magnitude. These effects are stronger when financial decisions require more discretion, when reviews are less automated, and when capital constraints are less binding. The variation in approval rates affects ex-post financial performance and produces significant real effects. Our analysis of the economic channels suggests that sentiment influences managers' risk tolerance and subjective judgment.

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Bridging the Gap? Government Subsidized Lending and Access to Capital (with Josh Lerner)

Review of Corporate Finance Studies, vol. 2, no. 1 (March 2013): 98–128.  

The consequences of providing public funds to financial institutions remain controversial. We examine the Community Development Financial Institution (CDFI) Fund’s impact on credit union activity, using hitherto little studied U.S. Treasury data. The CDFI Fund grants increase lending at credit unions by 3%. For every dollar awarded, 45 additional cents are loaned out to borrowers in the first year, and up to an additional $1.60 is loaned out within three years. Delinquent loan rates also increase slightly. Our panel results are supported by a broadband regression discontinuity analysis. Politics does not seem to play a role in allocating funding.

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Working Papers

Did Local Lenders Forecast the Bust? Evidence from the Real Estate Market 

This paper shows that mortgage lenders with a physical presence near the property being financed have better information about home-price fundamentals than non-local lenders. Within the same lender, loan origination and retention decrease when the lender has a branch in an area with high home price appreciation. From 2002-06, home price growth negatively correlates with the share of loans made by local lenders. Home prices fell less from 2006-09 in areas where local lenders made more loans. California foreclosure rates during the crisis are negatively correlated with local lending pre-crisis. A standard deviation increase in local loans is associated with 5 fewer foreclosures for every one thousand homes. The results for both prices and foreclosures are even stronger when lenders retain the loans.

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Rebuilding After Disaster Strikes: How Local Lenders Aid in the Recovery 

I document the benefits of access to local finance for new and small firms using detailed employment data on firm age and size. I use natural disasters and regulatory guidance to disentangle the effects of credit supply and demand. I find that an additional standard deviation of local finance offsets the negative effects of the disaster and can lead to 1 to 2% higher employment growth. I show that local lenders increase lending but are not borrowing against future lending. The findings suggest that local lenders play an important and necessary role in job creation in the economy.

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The Unintended Consequences of Employer Credit Check Bans on Labor and Credit Markets (with Andrew Glover and Murat Tasci) 

Since the Great Recession, 11 states have restricted employers’ access to the credit reports of job applicants. We document that county-level vacancies decline between 9.5 percent and 12.4 percent after states enact these laws. Vacancies decline significantly in affected occupations but remain constant in those that are exempt, and the decline is larger in counties with many subprime residents. Furthermore, subprime borrowers fall behind on more debt payments and reduce credit inquiries post-ban. The evidence suggests that, counter to their intent, employer credit check bans disrupt labor and credit markets, especially for subprime workers.

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Where are the Large Banks? Stress Tests and Small Business Lending (with Yuliya Demyanyk, Lei Li, Elena Loutskina and Philip E. Strahan)

Bank small business lending dropped after the 2008 Financial Crisis and has seen very slow recovery, barley reaching 2001 levels. We show that post-crisis stress tests help explain this lack of recovery. Banks affected more by stress tests raise prices on small business loans and reduce quantity. The supply reduction affects risky, but not safe, small business loans. the prices increases are concentrated in geographies where banks have branches, but the declines in quantities are concentrated where they do not. Banks price the implied increases in capital requirements from stress tests where they have local knowledge