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Post-crisis stress tests have altered banks’ credit supply to small business. Banks most affected by stress tests reallocate credit away from riskier markets and toward safer ones. They also raise interest rates on small loans. Quantities fall most in high-risk markets where stress-tested banks own no branches, and prices rise mainly where they do. The results suggest that banks price the stress-test induced increase in capital requirements where they have local knowledge, and exit where they do not. Stress tests do not, however, reduce aggregate credit. Small banks seem to increase their share in geographies formerly reliant on stress-tested lenders.

The Federal Reserve conducts stress tests of the largest bank holding companies to ensure that the banking system has sufficient capital to stay financially sound in the event of worsening economic conditions. Some groups have raised concerns that the stress tests will reduce lending to small businesses. This article describes recent research investigating the impact of the stress tests on small-business lending. It finds that the banks that are most affected by stress tests have reduced their small-business credit, but aggregate credit to small businesses has not fallen.

US consumption has gone through steep ups and downs since 2000. We quantify the statistical impact of income, unemployment, house prices, credit scores, debt, financial assets, expectations, foreclosures and inequality on county‐level consumption growth for four subperiods: the ‘dot‐com recession’ (2001–3), the ‘subprime boom’ (2004–6), the Great Recession (2007–9) and the ‘tepid recovery’ (2010–12). Consumption growth cannot be explained by a few factors; rather, it depends on a large number of variables whose explanatory power varies by subperiod. Growth of income, growth of housing wealth and fluctuations in unemployment are the most important determinants of consumption, significantly so in all subperiods, while fluctuations in financial assets and expectations are important during only some subperiods. Lagged variables, such as the share of subprime borrowers, are significant but less important.

This paper debunks the common perception that “foreclosure will ruin your credit score.” Using individual-level data from a credit bureau matched with loan-level mortgage data, it is estimated that the very first missed mortgage payment leads to the biggest reduction in credit scores. The effects of subsequent loan impairments are increasingly muted. Post-delinquency foreclosures have only a minimal effect on credit scores. Moreover, credit scores improve substantially a year after borrowers experience 90-day delinquency or foreclosure. The data supports one possible explanation of this improvement: the absence of mortgage payments relaxes the borrowers’ budget constraint, allowing them to restore other forms of credit.

We use individual-level credit reports merged with loan-level mortgage data to estimate how home equity interacted with mobility in relatively weak and strong labor markets in the United States during the Great Recession. We construct a dynamic model of housing, consumption, employment, and relocation, which provides a structural interpretation of our empirical results and allows us to explore the role that foreclosure played in labor mobility. We find that negative home equity is not a significant barrier to job-related mobility because the benefits of accepting an out-of-area job outweigh the costs of moving. This pattern holds even if homeowners are not able to default on their mortgages. (JEL D14, G01, J61, R23, R31)

We argue that fiscal stimulus funded by public debt is effective for increasing economic activity and employment even in recessions that are caused by overborrowing in the private sector. We analyze the impact of government spending on local economies between 2007 and 2009 and find evidence that the fiscal multiplier is higher in geographical areas characterized by higher individual household debt.

US consumption has gone through steep ups and downs since the turn of the millennium, but the causes of these fluctuations are still imperfectly identified. We describe research that quantifies the relative impact of nine significant determinants of consumption growth. The explanatory power of these factors varies by period, implying that successful modelling of this decade poses many challenges.

Post-crisis stress tests have altered banks’ credit supply to small business. Banks affected by stress tests reduce credit supply and raise interest rates on small business loans. Banks price the implied increase in capital requirements from stress tests where they have local knowledge, and exit markets where they do not, as quantities fall most in markets where stress-tested banks do not own branches near borrowers, and prices rise mainly where they do. These reductions in supply are concentrated among risky borrowers. Stress tests do not, however, reduce aggregate credit. Small banks increase their share in geographies formerly reliant on stress-tested lenders.

Some reports have suggested that employers can't fill job openings in some places because they can't entice workers to move. Workers won't move, so the story goes, when doing so will mean losing money on their homes, and this is the case for many homeowners since the housing crash. But new research shows that homeowners will move when they have a better job offer, even if they will lose money on their home when they sell it.

The Great Recession brought an end to a 20-year expansion of consumer debt. In its wake is a lively debate about what caused the turnaround. Was it motivated by a decreased appetite for debt by consumers or an unwillingness to lend by banks? Our analysis of Equifax and Mail Monitor data shows that the major cause was most likely consumers.

On close inspection many of the most popular explanations for the subprime crisis turn out to be myths. Empirical research shows that the causes of the subprime mortgage crisis and its magnitude were more complicated than mortgage interest rate resets, declining underwriting standards, or declining home values. Nor were its causes unlike other crises of the past. The subprime crisis was building for years before showing any signs and was fed by lending, securitization, leveraging, and housing booms.

Using loan-level data, we analyze the quality of subprime mortgage loans by adjusting their performance for differences in borrower characteristics, loan characteristics, and macroeconomic conditions. We find that the quality of loans deteriorated for six consecutive years before the crisis and that securitizers were, to some extent, aware of it. We provide evidence that the rise and fall of the subprime mortgage market follows a classic lending boom-bust scenario, in which unsustainable growth leads to the collapse of the market. Problems could have been detected long before the crisis, but they were masked by high house price appreciation between 2003 and 2005. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org., Oxford University Press.

Starting in 1978, the U.S. banking sector was gradually deregulated in terms of restrictions on geographical expansion. This paper examines the impact of intrastate branching deregulation on self-employment income growth rates. Cross-state evidence suggests that the growth rate of self-employment income increased after reform, with the effect being more pronounced for women and non-white minorities at the low end of the income distribution. As banks are the prime source of finance for the self-employed, the results suggest that branching reform led to improved access to credit for previously underserved business owners.

We estimate the effects of deregulation of U.S. banking restrictions on interstate personal income insurance for the period 1970 to 2001. Interstate income insurance occurs when personal income reacts less than one-to-one to state-specific output shocks. We find that insurance improved after banking deregulation, with a larger effect in states where small businesses are more important and on proprietors' income than on other components of personal income. Our explanation centers on the role of banks as a prime source of small business finance and on the close intertwining of the personal and business finances of small business owners. Copyright 2007 by The American Finance Association.

U.S. consumption has gone through steep ups and downs since the turn of the millennium, but the causes of these fluctuations are still imperfectly identified. We quantify the relative impact on consumption growth of income, unemployment, house prices, credit scores, debt, expectations, foreclosures, inequality, and refinancings for four subperiods: the "dot-com recession" (2001-2003), the "subprime boom" (2004-2006), the Great Recession (2007-2009), and the "tepid recovery" (2010-2012). We document that the explanatory power of different factors varies by subperiods, implying that a successful modeling of this decade needs to allow for multiple causal determinants of consumption.

New research highlights how disparities in the regulatory treatment of banks and shadow banking organizations before the financial crisis allowed heavily-regulated bank holding companies to lend through their less-regulated subsidiaries. Doing so helped them to conserve their regulatory capital, avoid recognizing costly loan losses, and pursue riskier lending while still adhering to banking regulations.

Mortgage companies (MCs) originated about 60% of all mortgages before the 2007 crisis and continue to hold a 30% market share postcrisis. While financial regulations are strictly enforced for depository institutions (banks), they are weakly enforced for MCs even if they are subsidiaries of a bank holding company (BHC). This study documents that the resulting regulatory arbitrage creates incentives for BHCs to engage in risk shifting through their MC affiliates. We show that MCs are established to circumvent the capital requirements and to shield the parent BHCs from loan-related losses. BHCs run the risky mortgage business through their MC affiliates. As compared to bank affiliates of BHCs, the MC affiliates lent more to individuals with lower credit scores, lower incomes, and higher loan-to-income ratios. MC borrowers experienced higher rates of foreclosure and delinquency during the crisis. Our results imply that the regulation in place had the capacity to prevent the deterioration of lending standards widely blamed for the crisis. The inconsistent enforcement of regulation, though, eroded its effectiveness. Higher involvement of mortgage companies in subprime lending and securitization activity do not explain our results.

All holders of mortgage contracts, regardless of type, have three options: keep their payments current, prepay (usually through refinancing), or default on the loan. The latter two options terminate the loan. The termination rates of subprime mortgages that originated each year from 2001 through 2006 a re surprisingly similar: about 20, 50, and 80 percent, respectively, at one, two, and three years after origination. For loans originated when house prices appreciated the most, terminations were dominated by prepayments. For loans originated when the housing market slowed, defaults dominated. The similarity of the loan termination rates for all vintages in the sample suggests that subprime mortgage loans were intended to be “bridge” (i.e., temporary) loans. In addit ion, between 2001 and 2006, the number of terminated subprime purchase-money loans (loans used to purchase rather than refinance a house) outweighed the estimated number of first-time-homebuyers with subprime mortgages. The effect of the subprime lending on the increase of homeownership in the United States—a potentially positive outcome of subprime mortgages—most likely has b een overstated. (JEL D12, G1, G21)

In this article we provide a summary of empirical results obtained in several economics and operations research papers that attempt to explain, predict, or suggest remedies for financial crises or banking defaults; we also outline the methodologies used in them. We analyze financial and economic circumstances associated with the U.S. subprime mortgage crisis and the global financial turmoil that has led to severe crises in many countries. The intent of this article is to promote future empirical research for preventing bank failures and financial crises.

This paper investigates whether risk sharing, measured as income and consumption smoothing, among countries in the EU and the European Economic and Monetary Union (EMU) has increased since the adoption of the euro. We ask: Have the recent increase in foreign equity and debt holdings been associated with more risk sharing? Do certain classes of assets (debt, equity, foreign direct investment) provide relatively more or less risk sharing? Do liabilities provide risk sharing differently from assets? Do investments in EMU countries provide more or less risk sharing per euro invested compared to investments in non-EMU countries? Has increased banking integration improved risk sharing? Due to the short span of years since the introduction of the euro, our results are tentative, but they indicate that the monetary union has facilitated risk sharing, although the level of risk sharing is still much below the level found among U.S. states.

One would think that credit scores would be a predictor of who would default on a subprime mortgage. But that doesn't seem to be the case.

This paper investigates whether risk sharing, measured as income and consumption smoothing, among countries in the EU and the European Economic and Monetary Union (EMU) has increased since the adoption of the euro. We ask: Have the recent increase in foreign equity and debt holdings been associated with more risk sharing? Do certain classes of assets (debt, equity, foreign direct investment) provide relatively more or less risk sharing? Do liabilities provide risk sharing differently from assets? Do investments in EMU countries provide more or less risk sharing per euro invested compared to investments in non-EMU countries? Has increased banking integration improved risk sharing? Due to the short span of years since the introduction of the euro, our results are tentative, but they indicate that the monetary union has facilitated risk sharing, although the level of risk sharing is still much below the level found among U.S. states.

We estimate potential welfare gains from financial integration and corresponding better insurance against country-specific shocks to output (risk sharing) for the twenty-five European Union countries. Using theoretical utility-based measures we express the gains from risk sharing as the utility equivalent of a permanent increase in consumption. We report positive potential welfare gains for all the EU countries if they move toward full risk sharing. Ten country-members who joined the Union in 2004 have more volatile or counter-cyclical consumption and output and would obtain much higher potential gains than the longer-standing fifteen members.

We estimate the effects of deregulation of U.S. banking restrictions on the amount of interstate personal income insurance during the period 1970–2001. Interstate income insurance occurs when personal income reacts less than one-to-one to state-specific shocks to output. We find that income insurance improved after banking deregulation, and that this effect is larger in states where small businesses are more important. We further show that the impact of deregulation is stronger for proprietors’ income than other components of personal income. Our explanation of this result centers on the role of banks as a prime source of small business finance and on the close intertwining of the personal and business finances of small business owners. Our analysis casts light on the real effects of bank deregulation, on the insurance function of banks, and on the integration of bank markets.

We estimate the effects of deregulation of U.S. banking restrictions on the amount of interstate personal income insurance during the period 1970-2001. Interstate income insurance occurs when personal income reacts less than one-to-one to state-specific shocks to output. We find that income insurance improved after banking deregulation, and that this effect is larger in states where small businesses are more important. We further show that the impact of deregulation is stronger for proprietors' income than other components of personal income. Our explanation of this result enters on the role of banks as a prime source of small business finance and on the close intertwining of the personal and business finances of small business owners. Our analysis casts light on the real effects of bank deregulation, on the risk sharing function of banks, and on the integration of bank markets.

U.S. consumption has gone through steep ups and downs since the turn of the millennium, but the causes of these fluctuations are still imperfectly identified. We describe research that quantifies the relative impact of nine significant determinants of consumption growth. The explanatory power of these factors varies by period, implying that successful modelling of this decade poses many challenges