Essays in Financial Intermediation
The first essay of my dissertation investigates how lender-specific shocks impact the strictness of the loan contract that a borrower receives. Exploiting between-bank variation in recent portfolio performance, I find evidence that banks write tighter contracts than their peers after suffering defaults to their own loan portfolios, even when
defaulting borrowers are in different industries and geographic regions than the current borrower. The effects of recent defaults persist after controlling for bank capitalization, although negative bank equity shocks are also strongly associated with tighter contracts. The evidence is consistent with lenders learning about their own screening technology
via defaults and adjusting contracts accordingly. Finally, contract tightening is most pronounced for borrowers who are dependent on a relatively small circle of lenders, with each incremental default implying covenant tightening equivalent to that of a ratings downgrade.
The second essay examines the use of soft information in primary and secondary mortgage markets. Using a large sample of mortgage loan applications, I develop a proxy for soft information collection based on the probability that a mortgage applicant had a face-to-face meeting with a loan officer. I find that the use of soft information increases the probability of loan approval, and conditional on loan approval, reduces the interest rate charged. These loans, however, are less likely to be sold, consistent with the difficulty in credibly communicating soft information. This provides evidence of one mechanism through which securitization may affect screening. Meanwhile, preliminary evidence suggests that screening based on soft information may be valuable to lenders,
with face-to-face meetings substantially reducing the growth in loan delinquencies during the recent period.
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