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As a response to the COVID-19 shock, the Uruguayan government expanded an existing public credit guarantee and introduced deductions in local currency reserve requirements. Policies of the same nature were also implemented by several governments throughout the world. This paper contributes to the financial additionality literature and the literature on the bank lending view of the monetary policy by analyzing the impact of this type of policies on loans' interest rate spread over the interbank rate. Using a very detailed database on loan contracts, we estimate a dynamic panel model to analyze the effects of policy responses to the COVID-19 shock over loan interest rates. We find that the PCG policy had a relatively higher effect on loans' interest rates in comparison to the reserve requirements policy. [ABSTRACT FROM AUTHOR]

This paper evaluates the imposition of caps on microcredit lending rates through credit policies for productive sectors. This financial inclusion intervention provides a unique quasi-experiment, allowing to estimate its effect following a difference-in-differences analysis. Our results suggest that the imposition of interest rate ceilings negatively affected the portfolio balance of new microcredits and loans to Small and Medium Enterprises (SMEs) granted by Micro Finance Institutions (MFIs). The balance of the microcredit and SME loans portfolio granted by MFIs, relative to the company portfolio granted by banks, decreased by 26.1% for an average MFI for the period 2011-2018. [ABSTRACT FROM AUTHOR]

Modern American society fosters a capitalist culture that depends on the extension of credit to purchase both basic and luxury items. Although the federal banking system has comprehensive regulation to control potential excesses, the nonbank lending industry is subject to a patchwork system of state laws that inadequately protects borrowers from predatory lending. Specifically, current state regulations leave a gap that permits an alternative lender to partner with a bank or a Native American tribe to evade the state maximum interest rates for loans to borrowers within that state. Nicknamed "rent-abank" and "rent-a-tribe" schemes, these devices allow predatory lending to continue even in states that have enacted laws to curb abusive practices. As these schemes are not generally prohibited, creative consumer advocates have found ways to sue these nonbank lenders, but courts have two applicable tests to choose between: the "predominant economic interest" test, which looks to the substance of the arrangement, or the "contractual" test, which promotes a legal fiction and allows these schemes to persist. As significant barriers to resolution exist at the federal level, states should adopt an amendment to their consumer protection laws prohibiting these schemes directly. This Note discusses how these arrangements work and why they exist, and it proposes a model statutory provision for states to adopt, designed to deter entry into these schemes and to abolish the practice. [ABSTRACT FROM AUTHOR]

The objective of this study is to determine the impact of money market conditions and a bank's regulatory environment on the interest rates banks charge on their loans. This is accomplished through the analysis of the effect of these impacts, in a multiperiod framework, on a bank's optimal investment and borrowing decisions and the minimum required rate of return on its asset portfolio. [ABSTRACT FROM AUTHOR]

The article discusses deposit rate ceilings and the valuation of banks in France from 1971 to 1981. A bank valuation model similar to the Modigliani-Miller concept predicts relationships between market value and asset-liability structures. Three hypotheses, which relate to corporate taxation, economic rent, and sources of the drop in market value for French banks in 1974, are tested. Regression analysis is used to test three assumptions about the valuation coefficient of treasury assets. Inflation and rent effects, a tax scalar, and two sets of constrained regressions are mentioned, as well as the negative impact of corporate taxation on the market value of assets and liabilities and a drop in a market-to-book-value ratio that is linked to a lower valuation of all bank assets.

We consider two problems in monetary and banking theory in this paper. The first of these deals with differences between monetary and tax-transfer resolutions of risk-sharing problems in overlapping-generations models of fiat money under uncertainty. Our second contribution—the scenario for which is also motivated in part by interventions needed for risk-sharing reasons—is an attempt to provide a rationale for interest-rate controls on the liabilities of intermediaries that invest in risky assets. Both models consider environments in which uncertainty exists, private markets are incomplete, and most importantly, some material payoff-relevant actions are not (perfectly) observable. The goal of this research is to provide further momentum to theoretical developments that serve to integrate information-based models of investment and intermediation with theories of unbacked fiat money, and the control of “monetary” institutions. [ABSTRACT FROM AUTHOR]

These findings (which were not expected) were discussed with a number of finance company executives experienced in operations. They were not surprised. It was their belief that most loans cost about the same to make and service. While some customers required more effort and expense than others, they could not generally be identified by the dollar amount of loans written at a particular time. For example, a $600 loan may be made to a good present customer who wants to borrow more money or may be made to a customer because he was unable to pay off a $1000 loan completely. In the first case, little effort is required; in the second case, the $600 loan was the end product of much consultation with (and possibly chasing of) the customer. An exception, though, may be large loans--loans over $1000--which are considered different than smaller loans because they are larger than the traditional size of loans made by finance companies. [ABSTRACT FROM AUTHOR]

The Canadian experience in removing the ceiling on federally insured mortgage loans provides a good illustration of the structural implications of the ceiling. After the ceiling was removed, the ratio of the conventional mortgage rate to the NHA rate fell from 112.8 percent to 103.0 percent, indicating that the ceiling provided a benefit of approximately 10 percent of the conventional mortgage rate for NHA borrowers. On the other hand, the ceiling substantially reduced the availability of this credit since the proportion of financial institution mortgage lending for new residential construction that was federally insured almost doubled after the ceiling was removed. Moreover, this reduction in availability fell primarily on low income borrowers since the proportion of NHA loans going to the bottom third of the income distribution rose from approximately 13 percent to 30 percent after the ceiling was removed. Thus, the removal of the rate ceiling on federally insured mortgage loans increased the cost of this credit by approximately 10 percent of the conventional mortgage rate, but substantially increased the availability of this credit, especially for low income borrowers. [ABSTRACT FROM AUTHOR]

Due in large part to the recent promulgation of the Uniform Consumer Credit Code (UCCC), there has been a renewal of interest among economists in the high-risk segment of the consumer credit market. To predict the effects of the maximum rate provisions of the UCCC, economists have typically employed the standard model of a monopolistic firm, with the single novelty being an adjustment of marginal revenue curves (or, alternatively, marginal cost curves) to compensate for differences in risk among individual borrowers). The position taken here is that these prior attempts have not paid sufficient attention to the peculiar technology of high-risk lenders; the independence of risk categories in an optimal loan portfolio has been implicitly assumed. It will be demonstrated that the relaxation of this stringent assumption significantly expands the set of feasible effects induced by the adoption of interest rate ceilings. [ABSTRACT FROM AUTHOR]

Recent research has established that finance companies accept poorer credit risks for personal loans where legal rate ceilings are higher. This finding suggests that the volume of personal loans extended or outstanding might also be positively associated with legal rate ceilings, but the supply of finance company personal loans has displayed positive, negative, and zero correlations with interest rate levels. There are two major reasons for this past chaos concerning supply: The credit data utilized have been faulty, and the model specifications have been inadequate. The purpose of this paper is to overcome these deficiencies. The first section below contains a brief description of the credit data that will be employed. The second section contains our model specifications. The test results are presented in section three. [ABSTRACT FROM AUTHOR]

The article presents an exploration into the economic conditions of the United States in 1966, particularly regarding the credit recession and the enactment of state usury laws limiting nominal mortgage interest rates. Questions are raised regarding the actual impact of such laws on the residential construction and mortgage industries due to corrections occurring within the effective yield rather than at the nominal level.

The article comments on the proposal for eliminating interest-rate ceilings without neglecting the problem of thrift institutions that necessisitated the initial application of the ceilings. It is explained that it is important to distinguish between thrift institutions' problems of both liquidity and solvency. The article proposes a way for providing thrift institutions with permanent relief from the liquidity problem and temporary emergency relief from the solvency problem. It was found that continues relief from the solvency problem involves improved rate forecasting.

The article discusses interest rate ceilings as a means of monetary control. The U.S. Federal Reserve's Regulation Q caps the interest member banks may pay on savings and time deposits, and actions by the Federal Home Loan Bank Board have served to limit interest paid by savings and loan associations. The author discusses the implications of rate ceilings and concludes they accomplish little that could not be achieved by conventional monetary tools. Moreover, they produce undesirable distributive and allocative consequences.

The article examines the impact of Regulation Q of the U.S. Federal Reserve. Regulation Q specifies the maximum rate of interest member banks of the Federal Reserve system may pay on time deposits. The Federal Reserve has cited Regulation Q as playing an important role in mitigating inflationary pressures. The author disputes this notion, arguing that "Q" has created structural upheaval in the banking industry while producing no social gain. In his view Regulation Q may confer certain political benefits to the Federal Reserve, but as an instrument of monetary policy should be abolished.

Ceilings on commercial bank deposits were first imposed in the thirties. Their announced purpose was to help assure the viability of the banking system by reducing competition. It was argued that banks would be less likely to reach for risky loans if they did not face competitive pressure from the cost of their deposits. More recently this argument has been in disfavor. Instead, deposit ceilings seem sometimes to be considered as a tool of monetary policy. However, little agreement seems to exist as to their effect at the aggregate level. Current theory leaves as an empirical question whether raising ceilings when they are effective is expansionary or contractionary. No convincing empirical evidence exists as to which is the case. The theory of the effect of deposit ceilings on GNP is based on the work of James Tobin and William Brainard. They pointed out that the effect of an increase in deposit ceilings is ambiguous as a proposition in comparative statics. Other things equal, a rise in time deposit rates may either increase or decrease the demand for outside money (i.e., currency plus reserves). The demand for currency and demand deposits will fall while the demand for time deposits will increase. The net effect depends on the magnitude of these elasticities as well as the magnitude of the reserve requirements on demand and time deposits. If a rise in time deposit rates produces a net increase in the demand for outside money, the effect of a rise in time deposit ceilings is contractionary. The rate of interest on market securities must rise in order to reduce the demand for outside money and reestablish equilibrium. Conversely, if a rise in time deposit rates produces a net decrease in the demand for outside money, the effect of an increase in time deposit ceilings is expansionary. Tobin and Brainard made no effort to determine which of these cases held for the U.S. economy. In fact, their model was poorly specified for empirical implementation. For inst... [ABSTRACT FROM AUTHOR]

The inflexibility of Savings and Loan deposit rates in relation to the interest rate on new mortgages is a frequently observed and highly significant phenomenon. This sluggishness of response is an important determinant of the cyclical flows of funds to and from the Savings and Loan industry. Its consequences for the cost and availability of home mortgages are both predictable and direct. The relative inflexibility of the deposit rate can be explained in two distinct, although not mutually exclusive, ways. On the one hand, there are a set of justifications which are grounded in the microtheory of the S&L firm. We shall refer to these as "structural" explanations. Such explanations examine the individual firm in a context free of regulatory constraints and seek to show that a low elasticity of the deposit rate with reference to the mortgage rate is a predictable implication of rational, profit maximizing firm behavior. Thus, the cyclical flows of funds to and from the S&L industry would appear to be an inherent characteristic of the free functioning of such an industry. [ABSTRACT FROM AUTHOR]

There is little doubt that usury laws and small loan laws effectively lower the finance rate to many borrowers obtaining installment loans from consumer credit lenders. But it also seems likely that the maximum rate provisions contained in small loan legislation restrict the availability of credit to marginal risk loan applicants, forcing them either to abstain from borrowing altogether or to seek credit from illegal lenders. The purpose of this paper is to demonstrate some of the effects of rate ceilings on credit allocation at consumer finance companies. First, price theory analysis is applied to the problem. Then, an empirical test measures the relationship between rate ceilings and credit rationing. Finally, the impact of rate ceilings on illegal lending and on general economic development in the low income sector of our economy is discussed. [ABSTRACT FROM AUTHOR]

The article focuses on questions of the appropriateness of interest rate ceilings within conditions of certain monetary restraint. The author compares the feasibility of interest rates versus interest ceilings in the allocation of credit flows in the U.S. monetary policy of the 1960s. The nature of institutional monetary constraints on financial incentives and resultant conditions is reviewed, with particular interest into the historical market shifts which occurred between 1962-1965. It is concluded that while common theory goes against rate ceilings, they have proven beneficial in certain scenarios towards protecting financial institutions.

The article examines the decision of the German Bundesfinanzhof (BFH) federal tax court concerning the unconstitutionality of section 4 of the Einkommensteuergesetz (EStG) income tax law in Germany on the ground of interest barrier. Topics include lack of evidence for the quantification of financing structure at net interest expense on EBITDA for shareholder debt financing; and the verdict of the German Bundesverfassungsgericht (BVerfG) federal constitutional court on the flat rate tax.

Abstract: We describe the competitive environment of microcredit markets globally and we study the effects of competition on loan rates of microfinance institutions (MFIs). We use a new database from rating agencies, covering 379 for‐profit and nonprofit MFIs in 67 countries over 2002–2008. Controlling for interest rate ceilings and other country‐specific factors, we first find that nonprofits are relatively insensitive to industry‐wide concentration changes, while for‐profits charge significantly lower rates in less concentrated markets. Second, we find spillover effects between the for‐profit and nonprofit segments. Third, we show that the effects of concentration are consistent with an information dispersion mechanism. [ABSTRACT FROM AUTHOR]

An advanced Heath-Jarrow-Morton forward rate model driven by time-inhomogeneous Lévy processes is presented which is able to handle the recent development to multiple curves and negative interest rates. It is also able to exploit bid and ask price data. In this approach in order to model spreads between curves for different tenors, credit as well as liquidity risk is taken into account. Deterministic conditions are derived to ensure the positivity of spreads and thus the monotonicity of the curves for the various tenors. Valuation formulas for standard interest rate derivatives such as caps, floors, swaptions and digital options are established. These formulas can be evaluated numerically very fast using Fourier-based valuation methods. In order to exploit bid and ask prices we develop this approach in the context of a two-price economy. Explicit formulas for bid as well as ask prices of the derivatives are stated. A specific model framework based on normal inverse Gaussian and Gamma processes is proposed which allows for calibration to market data. Calibration results are presented based on multiple-curve bootstrapping and cap market quotes. We use data from September 2013 as well as September 2016. The latter is of particular interest since rates were deep in negative territory at that time. [ABSTRACT FROM AUTHOR]

This article examines perceptions and practices of habitual usury, a crime consisting of lending above the legal rate of interest on multiple occasions, in early nineteenth-century France using descriptions of usury trials found in the popular legal periodical the Gazette des Tribunaux. Following the French Revolution, French law legitimized lending at interest in principle, but punished ‘habitual usurers’ who ‘made a profession’ from lending above the legal limit. The decades that followed witnessed striking growth in banking, joint-stock companies and other financial institutions. Highlighting the connections between cultural constructions of the usurer and the actual processes deemed usurious, this article seeks to understand a paradox: that usury was deemed omnipresent in French society yet it was rarely prosecuted. By examining how habitual usury was defined and prosecuted in French courtrooms, this article shows how habitual usurers both validated and undermined stereotypical notions of predatory lending behavior found in popular culture of the time. Habitual usury trials also reveal the actual practices that allowed those excluded from formal financial networks to participate in the growth of capitalist relations. This article argues that the nineteenth-century obsession with the usurer can be explained by the crucial role played by usurious practices in the credit economy of the period. As such, prosecution of usury tended to focus on the character of the usury rather than the actual practice of illegal lending. This article suggests that by occasionally prosecuting particularly egregious ‘immoral’ moneylenders, the legal system and journals like the Gazette des Tribunaux worked to keep credit accessible to the ‘underbanked’. [ABSTRACT FROM PUBLISHER]

The article presents comments on "Bank Regulation and Monetary Policy." The author states that deregulation has gained attention because competition in the financial sector have forced regulators and legislators to recognize limitations of existing regulations. The article explains why interest rate ceilings were removed and discusses deregulation and financial crises. Additional article topics include whether deregulation contributes to the overall instability of the financial system and the author states that asset deregulation is not needed to produce financial instability that affects the behavior of monetary policy.

The objective of this study is to provide closed form solutions to financial derivatives on mean-reverting cash flows. The general equilibrium real business cycle specification implies that underlying prices follow geometric mean reversion processes. Option-pricing formulas are derived, in terms of macroeconomic parameters or observable market prices, both for consumption goods and interest rates. The framework offers a rich specification of the economy’s yield curve and caplet volatility surface, which seems to fit well with criteria suggested by the empirical literature. The methodology may be useful for studying the effects of real economy changes on financial markets. [ABSTRACT FROM PUBLISHER]

The interest rate ceiling and floor are the popular interest rate derivatives in a financial market. In this paper, the valuation of interest rate ceiling and floor is investigated by using uncertainty theory. Different from the classical stochastic interest rate models, the uncertain interest rate model is used in this paper as the basis of evaluating the interest rate ceiling and floor. Based on the assumption that the short interest rate follows uncertain differential equations, the price formulas of interest rate ceiling and floor are derived. [ABSTRACT FROM AUTHOR]

The term structure of interest rates cannot be used to fully explain and hedge the prices of interest rate derivatives. Unspanned stochastic volatility improves the accuracy of interest rate derivatives valuation but is still inadequate to capture the variation of skews in the implied volatility surface. In this study, we document the stochastic variation of implied volatility skews in the interest rate cap market. To develop a term structure model that is consistent with the empirical phenomena, we incorporate the Wishart process into the standard LIBOR market model, namely, the LIBOR N-dimensionalWishart ("LNW" for short) market model and derive a closed-form, accurate, efficient caplet pricing formula. The capacity of the LNW model to capture stochastic skews is examined and compared with that of LIBOR multi-Heston ("LMH" for short) market model with two and three stochastic volatilities. We find that the LNW model outperforms itsLMHcounterparts in terms of both in-sample and out-of-sample pricing errors. [ABSTRACT FROM AUTHOR]

The article discusses the regulations regarding non-secured instant consumer loans in Sweden. Topics include Swedish Consumer Credit Act, mortgage agreements that fall in the Consumer Credit Act, civil law regulations, license required by finance companies under the Swedish Financial Supervisory Authority (FSA), rules regarding responsible lending, and the issues concerning cap on interest rates.

Highlights: [•] Price caps and prohibitions on AFS products are associated with reduced supply. [•] A 36% APR cap is associated with a 28% reduction in auto title borrowing. [•] A 3% interest rate cap is associated with a 23% reduction in pawnshop borrowing. [•] Prohibiting payday loans is associated with a 32% decline in payday borrowing. [Copyright &y& Elsevier]

Usury laws cap the interest rates that lenders can charge. Using data from Prosper.com, an online lending marketplace, I investigate the effects of these laws. The key to my empirical strategy is that there was initially substantial variability in states' interest rate caps, ranging from 6% to 36%. A behind-the-scenes change in loan origination, however, suddenly increased the cap to 36%. The main findings of the study are that higher interest rate caps increase the probability that a loan will be funded, especially if the borrower was previously just "outside the money." I do not find, however, changes in loan amounts and default probability. The interest rate paid rises slightly, probably because online lending is substantially, yet imperfectly, integrated with the general credit market. [ABSTRACT FROM AUTHOR]

Abstract: Quantum finance successfully implements the imperfectly correlated fluctuation of forward interest rates at different maturities, by replacing the Wiener process with a two-dimensional quantum field. Interest rate derivatives can be priced at a more realistic value under this new framework. The quantum finance model requires three main ingredients for pricing: the initial forward interest rates, the volatility of forward interest rates, and the correlation of forward interest rates at different maturities. However, the hedging strategy only focused on fluctuation of forward interest rates. This hedging method is based on the assumption that the propagator, the covariance of forward interest rates, has an ergodic property. Since inserting the propagator is the main characteristic that distinguishes quantum finance from the Libor market model (LMM) and the Heath, Jarrow and Morton (HJM) model, understanding the impact of propagator dynamics on the price of interest rate derivatives is crucial. This research is the first step in developing a hedge strategy with respect to the evolution of the propagator. We analyze the dynamics of the propagator from Libor futures data and the integrated propagator from zero-coupon bond rate data. Then we study the sensitivity of the implied volatility of caplets and swaptions according to the three dominant dynamics of the propagator, and the change of the zero-coupon bond option price according to the two dominant dynamics of the integrated propagator. [ABSTRACT FROM AUTHOR]

Abstract: Can the liquidity premium in asset prices, as documented in the exchange-traded equity and bond markets, be generalized to the over-the-counter (OTC) derivative markets? Using OTC euro (€) interest rate cap and floor data, we find that illiquid options trade at higher prices relative to liquid options. This liquidity discount, though opposite to that found in equities and bonds, is consistent with the structure of this OTC market and the nature of its demand and supply forces. The results suggest that the effect of liquidity on asset prices cannot be generalized without regard to the characteristics of the market. [Copyright &y& Elsevier]

The article discusses the Credit Card Act of 2009 specifically its provisions aiming to protect college-aged consumers. The author cites the students' high debt figures and discusses the negative impact on their academic, personal and future professional lives. He identifies loopholes that have enabled circumventions and deliberates on proposals which include increases in age and ability-to-pay requirements, limits to increasing credit limits and imposition of usury or interest rate caps.

An article is presented that discusses moneylending and views of it as exploitative and monopolizing. The article describes moneylending as an intervention, as well as the concept of ceilings for interest accumulation. Information is provided on these ceilings as they relate to the colonial Indian Hindu Law known as Damdupat and how it affects interest caps, welfare, and financial risk. The article also discusses subjects related to regulating moneylenders including collateral, borrower protection, competition, and subprime lending crises.

This paper considers a modified constant elasticity of variance (MCEV) model. This model uses the familiar constant elasticity of variance form for the volatility of the growth optimal portfolio (GOP) in a continuous market. It leads to a GOP that follows the power of a time-transformed squared Bessel process. This paper derives analytic real-world prices for zero-coupon bonds, instantaneous forward rates and options on the GOP that are both theoretically revealing and computationally efficient. In addition, the paper examines options on exchange prices and options on zero-coupon bonds under the MCEV model. The semi-analytic prices derived for options on zero-coupon bonds can subsequently be used to price interest rate caps and floors. [ABSTRACT FROM AUTHOR]

Usury law is often criticized by economists for curtailing lending and thus creating deadweight costs. This paper shows that if moral hazard leads to credit rationing, a just-binding usury law creates a deadweight gain. This property also holds in most market-clearing equilibria. Independent of social insurance benefits, or curbing present-biased preferences, interest rate caps have merit. [ABSTRACT FROM AUTHOR]

The article offers updates on laws in Great Britain. These include the law involving the share sale and purchase agreement in which it states that the notional payment could only be intermediate or provisional where the set-off was disputed. Meanwhile, in the loans used for gambling, it is stated that whether or not a person was carrying on a business depended on a number of factors, the activity's regularity was not the only indicia in taking into considerations. Further, it is also said that the significance of a fiduciary relationship was that the relations between the parties is by which parties were such that one of them had to subordinate an own interests.

We use the extended CIR model to value interest rate caps and floors. The extension allows arbitrary initial term structure, in the spirit of Hull and White, a crucial feature since we show that the pricing of the considered contingent claims improves dramatically after taking into account the big stake of market information contained in the yield curve. We compute model prices of at the money caps using only yield curve data, and we compare prices with those obtained when other well-known short-rate models are used, including the extended Vasicek model. With respect to natural benchmarks, we find a significant decrease in the pricing error for longer maturity caps when our model is used. These results witness that when a better specification of the dynamics of spot rate is provided, a satisfactory pricing of caps and floors is possible using only the information available in the bond market. Copyright © 2008 John Wiley & Sons, Ltd. [ABSTRACT FROM AUTHOR]

Abstract: Traditional asset–liability management techniques limit banks’ abilities to structure their balance sheets—but more recently, financial innovations have allowed banks the chance to manage interest rate risk without constraining their asset–liability choices. Using canonical correlation analysis, we examine how the relationships between asset and liability accounts at U.S. commercial banks changed between 1990 and 2005. Importantly, we show that asset–liability linkages are weaker for banks that are intensive users of risk-mitigation strategies such as interest rate swaps and adjustable loans. Perhaps surprisingly, we find that asset–liability linkages are stronger at large banks than at small banks, although these size-based differences have diminished over time, both because of increased asset–liability linkages at small banks and decreased linkages at large banks. [Copyright &y& Elsevier]