Competition in Local Mortgage Markets

Darren Aiello (UCLA)
Mark J. Garmaise (UCLA)
Gabriel Natividad (Universidad de Piura)

Abstract : We identify local lending shocks for competing mortgage providers by uncovering discontinuities in mortgage acceptance models. Shocks to standard measures of the concentration of its competitors do not explain a bank’s future lending patterns. Instead it is the expansion of a bank’s most aggressive competitor that leads to reduced lending, particularly at the very local level. A stronger shock to this competitor also leads a bank to charge higher interest rates, which are partially explained by the observable worsening of its borrower pool. Competition also has a negative effect on unobservable risk; it leads to worse mortgage performance.

Deposit Insurance, Market Discipline, and Bank Risk

Alexei Karas (Univ. College Roosevelt and Utrecht Univ.)
William H. Pyle (Middlebury College)
Koen Schoors (Ghent University)

Abstract : Using evidence from Russia, we explore the effect of deposit insurance on bank behavior and performance. Drawing on cross-sectional, bank-level variation in the ratio of deposits held by insured households and uninsured firms, both before and after the introduction of explicit deposit insurance, we demonstrate that banks at which the decline in market discipline was relatively large were more likely to experience a greater subsequent increase in traditional measures of bank risk and a greater subsequent rate of failure. These results are robust to the inclusion of time-varying bank-specific controls, alterations to the time horizon for assessing bank risk, the exclusion of observations from after the global financial crisis and bank-level fixed effects. Moreover, they hold in a difference-in-difference setting in which state and foreign-owned banks, whose deposit insurance regime has not changed over our period of analysis, serve as a control.

Beyond the Informal/formal Divide. How Do Firms Combine Contract-enforcement Institutions?

Karoly Mike (Corvinus University of Budapest)
Gábor Kiss (HETFA Research Institute)

Abstract : This paper explores how a broad range of contract-enforcement institutions are combined in interfirm relationships under a developed legal system. We analyse managerial survey data to identify ideal-types of governance strategies that rely on distinct combinations of institutions. We find three ideal-types: (1) bilateral governance, using morality and self-enforcement; (2) third-party governance, leaning on a mix of courts, reputation and community norms; and (3) comprehensive governance, relying heavily on all institutions. Thus, the crucial governance choice is not between formal/informal but bilateral and third-party (both formal and informal) institutions. The two sets can be substitutes but are more often complements. Governance choice is primarily related to transaction characteristics rather than the firm’s environment.

What Motivates the Securities Regulators? an Empirical Assessment of Securities Enforcement Actions in China 1998-2016

Chao Xi (The Chinese University of Hong Kong)

Abstract : Little is known about what motivates primary Chinese securities regulators, viz., the China Securities Regulatory Commission, the Shanghai Stock Exchange, and the Shenzhen Stock Exchange. This research draws on a unique, hand-collected dataset on all disclosed securities enforcement actions, both formal and informal, taken against securities violations by the Chinese securities regulators during the period from 1998 through 2016. It offers a rare glimpse into the intensity of enforcement actions, both market-level and firm-level, in China. It shows, among other things, that on average 5.28 enforcement actions have been taken during the period under investigation against a firm that has been targeted, and that 14.26% of the sample firms have been targeted once, 16.62% targeted twice, and 69.13% targeted three times or more. When it comes to the determinants of Chinese securities enforcement practices, this research shows empirically that (a) less enforcement actions and more lenient enforcement actions are likely to be taken against firms of larger size, firms that are controlled by the state, and firms that demonstrate a higher level of political embeddedness; and (b) a greater degree of cooperation with the securities regulators and a closer personal bond with the securities regulators are likely to reduce the severity of enforcement actions, but are unlikely to minimize the likelihood of being targeted in the first place. This research has been supported by a General Research Fund (CUHK-452913) from the Hong Kong SAR Research Grants Council.