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FIIE-7: Regulation, Credit and Hedge funds
Loan Guarantees and Credit Supply
1Princeton, United States of America; 2Chicago Booth School of Business; 3MIT Sloan
The efficiency of federal lending guarantees depends on whether guarantees increase lending supply, or simply crowd out more efficient private loans. We estimate the elasticity of lending supply to loan guarantees by exploiting notches in guarantee rates for loans made by the Small Business Administration. We find significant bunching on the side of the threshold with higher loan guarantees, and estimate an elasticity of lending supply to loan guarantees of approximately 4.9. We find that the excess mass is greater in years when guarantees are higher, and placebo estimates indicate no bunching in years when guarantees are identical across the threshold.
Federal Reserve Bank of New York, United States of America
We argue that post-crisis bank regulation can explain large, persistent deviations from parity on basis trades requiring leverage. Documenting the financing cost and balance sheet impact of a broad array of basis trades for regulated institutions, we show that the implied return on equity on such trades is considerably lower under post-crisis regulation. Moreover, the greatest increases in the level of the basis and the greatest decreases in implied return on equity occur for trades with the biggest increases in balance sheet impact. Though hedge funds would serve as natural alternative arbitrageurs to regulated institutions, we document that funds reliant on leverage from a global systemically important bank suffer significant declines in assets and returns relative to unlevered funds. Thus, post-crisis regulation not only affects the targeted banks directly, but also spills over to unregulated firms that rely on bank intermediation for their arbitrage strategies.
Capital Regulations and Credit Line Management during Crisis Times
1The VU Amsterdam, Netherlands; 2Tinbergen Institute; 3De Nederlandsche Bank; 4Oesterreichische National Bank
Credit line drawdowns by firms reduce a bank's regulatory capital ratio. Using the Austrian Credit Register, we provide novel evidence that during the 2008-09 financial crisis, capital-constrained banks managed this concern by substantially cutting little-used credit lines. Controlling for a bank's capital position, we also find that greater liquidity problems induced banks to considerably cut little-used credit lines over 2008-09. These results suggest that banks actively manage both capital and liquidity risk caused by undrawn credit lines in periods of financial distress, but thereby reduce liquidity provision to firms exactly when they need it most.
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Conference: EFA 2019
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