Weekly Research Rundown – October 03, 2019

Weekly Research Rundown – October 03, 2019

Why the Ability-to-Repay Rule is Vital to Financial Stability

In an effort to avoid a replay of the 2008 financial crisis, Congress instituted the ability-to-repay/qualified mortgage rule (ATR/QM), which requires residential mortgage lenders to make a reasonable determination of a borrower’s ability to repay before granting a loan. The article argues that the ATR/QM rule not only protects consumers but preserves financial stability by limiting real estate bubbles. Drawing on an empirical study by the Consumer Financial Protection Bureau, the author finds that lenders comply with the rule, that they are aware of liability exposure, and that the rule has resulted in a reduction in mortgage default rates under economic stress.

Read More: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3444360


Mortgage Finance in the Face of Rising Climate Risk

As the risk of natural disasters increases due to climate change and the number and dollar amount of National Flood Insurance Program insurance policies decline, mortgage lenders are faced with greater potential losses. This paper uses loan-level mortgage data and neighborhood-level disaster data to study the effect of natural disasters on banks’ securitization of mortgages via Fannie Mae and Freddie Mac. The authors find that, in the wake of natural disasters, banks increase their originations of securitization-eligible loans, which in turn increases default risk.

Read More: https://www.nber.org/papers/w26322


FinTech, BigTech, and the Future of Banks

There has been much excitement over the threat posed to banks by financial firms driven by big data and digital technology (FinTech) and large, established companies with successful digital platforms (BigTech). This paper argues that banks retain unique advantages, such as experience dealing with regulators and a broader offering of products, but that more narrowly focused FinTech firms can challenge banks on an uneven regulatory playing field while BigTech firms bring their own unique advantages to consumer finance and small business lending. The author concludes that this competition from FinTech and BigTech can drive banks to improve their services, but also induce them to take more risks in an effort to remain profitable.

Read More: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3455297


How Prepared are Markets for the End of Libor?

Many new contracts maturing after 2021 continued to reference Libor even though the interest rate benchmark will likely be phased out by that time. This post shows that Libor is especially dominant in lending markets, where the stock of Libor-linked contracts maturing after 2021 has grown over the past year. The authors encourage firms to develop transition plans and to shift new business too alternative rates.

Read More: https://www.bankofengland.co.uk/bank-overground/2019/how-prepared-are-markets-for-the-end-of-libor