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Empirical Essays on Strategic Behaviors: Application to the Banking and Financial Institutions Open Access

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My dissertation research focuses on the strategic behaviors of banks and financial intermediaries, with regard to the loans they issue or service. It contains three empirical essays: the first examining the effects of short-selling ban on banks' lending behaviors, the second studying borrowers' strategic behaviors to exercise delinquency option and default option, and the third analyzing the strategic behaviors of banks as sellers and servicers in the transitional performance of mortgage loans. My first chapter examines the effects of the 2008 short-selling ban on banks' lending behaviors. Comparing the affected banks with other banks of similar characteristics, I find that the treated banks enjoy more adequate capital reserves and a higher perceived financial stability, as reflected by their CDS spreads and traded options. Those banks were also more able to increase equity issuance, maintain a higher deposit growth rate, and keep more adequate capital reserves. Subsequently, affected banks extended credit at lower markups and experienced lower loan default rates. These effects are temporary as they manifest during the short-selling ban but disappear after the ban is lifted. My second chapter studies borrowers' strategic behaviors to exercise delinquency option and default option. The Basel capital rule framework and much of the recent literature on mortgage default have used 60-day or 90-day delinquency to define mortgage default; yet the differences between default (here meaning actual loss of the property) and delinquency have been neither clearly recognized nor well understood. By distinguishing borrowers' delinquency option (borrowing by not making payments) from default option (giving up property in exchange for the mortgage), I find that borrowers' delinquency options are more affected by personal trigger events or “shocks”, while default options are mostly affected by negative equity. Moreover, while origination underwriting standards contributes to increasing delinquencies, its influence on default, on the other hand, is decreasing over the years. As a result studies that have used delinquency in models designed to analyze actual losses appear to have made major errors in understanding causes of financial losses during the Great Recession.Following up with my previous chapters, Chapter Three analyzes the roles of banks as a seller or servicer in the transition probabilities from delinquency to default and other outcomes. Previous literature have overlooked the effects of mortgage banks as sellers or servicers on loan performance. My results suggest that banks' balance sheet health and business incentive structure play a crucial role in the loan performance. For banks with higher retail funding, higher equity ratio, better credit rating, and less servicing automation, their loans have lower transitional probabilities from delinquency to default, and higher probabilities to get modified.

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