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Session Overview
FIIE-3: Limits to Regulation
Saturday, 24/Aug/2019:
9:00 - 10:30

Session Chair: Ralf Meisenzahl, Federal Reserve Board
Location: D -112

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Can Technology Undermine Macroprudential Regulation? Evidence from Peer-to-Peer Credit in China

Fabio Braggion1, Alberto Manconi2, Haikun Zhu3

1Tilburg University, Netherlands, The; 2Bocconi University, Italy; 3Erasmus University, Netherlands, The

Discussant: Glenn Schepens (European Central Bank)

We study whether and to what extent peer-to-peer (P2P) credit helps circumvent loan-to-value (LTV) caps, a key macroprudential tool to contain household leverage. We exploit the tightening of mortgage LTV caps in a number of cities in China in 2013 as our testing ground, in a difference-in-differences setting, and we base our tests on a novel, hand-collected database covering all lending transactions at RenrenDai, a leading Chinese P2P credit platform. P2P loans increase at the cities affected by the LTV cap tightening relative to the control cities, consistent with borrowers tapping P2P credit to circumvent the regulation. The granularity of our data allows us to separate credit demand from credit supply effects, with a fixed effects strategy. Our results also indicate that P2P lenders do not adjust their pricing and screening to the influx of new borrowers after 2013, despite the fact that their loans ex post have higher delinquency and default rates. Symmetric effects are associated with a loosening of mortgage LTV caps in 2015. Our test provides empirical evidence on the capacity of P2P credit to undermine LTV caps. More broadly, our analysis informs the debate on the challenges posed by the interaction between FinTech and credit regulation.

efa2019-FIIE-3-1126-Can Technology Undermine Macroprudential Regulation Evidence.pdf

Winning Connections? Special Interests and the Sale of Failed Banks

Deniz Igan1, Thomas Lambert2, Wolf Wagner2, Eden Zhang3

1IMF; 2Erasmus University; 3Monash University

Discussant: Joao Granja (University of Chicago)

We study how lobbying affects the resolution of failed banks using a sample of FDIC auctions between 2007 and 2016. We show that bidding banks that lobby regulators have a higher probability of winning an auction. In addition, the FDIC incurs higher costs in such auctions, amounting to 18.4 percent of the total resolution losses. We also find that lobbying winners have worse operating and stock market performance than their non-lobbying counterparts, suggesting that lobbying results in a less efficient allocation of failed banks. Our results provide new insights into the bank resolution process and the role of special interests.

efa2019-FIIE-3-971-Winning Connections Special Interests and the Sale.pdf

Liquidity Support in Financial Institutions

Falko Fecht1, Egemen Genc2, Yigitcan Karabulut1,3

1Frankfurt School of Finance and Management; 2Rotterdam School of Management, Erasmus University; 3CEPR

Discussant: Teodora Paligorova (Federal Reserve Board)

Using a unique administrative dataset of portfolio holdings of all financial institutions in Germany, we analyze the fund flows from banks to their affiliated mutual funds. We document that parent banks provide support to their affiliated mutual funds against temporary liquidity shortfalls that is beneficial both for the funds and existing fund investors. We further demonstrate that banks provide this liquidity support by directing their retail and institutional customers to their distressed funds, who, in exchange, enjoy a liquidity premium over the subsequent period. Thus, our results indicate that banks can internalize the externalities arising from temporary liquidity shocks both for their affiliated-funds and their customers.

efa2019-FIIE-3-1040-Liquidity Support in Financial Institutions.pdf

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