Topic: Bank Risk-Taking and the Real Economy: Evidence from the Housing Boom and its Aftermath
Speaker: Giovanni Favara, Federal Reserve Board
Date: November 7 (Wednesday)
Time: 10:00-11:30am
Location: Building 4 Room 101
Language: English
Abstract:
The short-termism of lenders amplifies boom-bust credit cycles, leading in turn to real costs for the aggregate economy. During the U.S. housing credit boom, publicly-traded banks increased mortgage lending activity and relaxed standards much more than privately-held banks, and more so if they were run by short-term oriented CEOs. In the ensuing bust, counties with greater exposure to short-term oriented public banks experienced more severe downturns across a variety of outcomes, including economically large drops in aggregate employment, durable consumption, and retail sales. The findings hold for text-based measures of short-term focus and are robust to using an identification strategy that instruments for county mortgage lending with shocks that are plausibly unrelated to local economic conditions. In all, we provide micro-founded evidence that the ownership structure and short-term focus of depository institutions matter for the real economy.
About the speaker:
Giovanni Favara works in the Division of Monetary Affairs at the Federal Reserve Board. In his position, he has oversight of the Macro-Financial Analysis section, which supports the monetary policy and financial stability mandates of the Board through policy analysis and longer-term research on the interaction between monetary policy, financial market conditions and economic activity. Prior to joining the Federal Reserve Board, he was an economist in the Research Department of the International Monetary Fund, and prior to that, he was an assistant professor of economics and finance at the University of Lausanne in Switzerland. His academic research focuses on financial markets, corporate finance and macroeconomic activity, and has been published in a variety of academic journals, including the American Economic Review, The Journal of Finance, the Review of Financial Studies and the Journal of Financial Economics.
