The Journal of Finance

Selling Failed Banks

Published: 6/20/2017,  Volume: 72,  Issue: 4  |  DOI: 10.1111/jofi.12512  |  Cited by: 139

JOÃO GRANJA, GREGOR MATVOS, AMIT SERU

The average FDIC loss from selling a failed bank is 28% of assets. We document that failed banks are predominantly sold to bidders within the same county, with similar assets business lines, when these bidders are well capitalized. Otherwise, they are acquired by less similar banks located further away. We interpret these facts within a model of auctions with budget constraints, in which poor capitalization of some potential acquirers drives a wedge between their willingness and ability to pay for failed banks. We document that this wedge drives misallocation, and partially explains the FDIC losses from failed bank sales.

Going the Extra Mile: Distant Lending and Credit Cycles

Published: 2/25/2022,  Volume: 77,  Issue: 2  |  DOI: 10.1111/jofi.13114  |  Cited by: 106

JOÃO GRANJA, CHRISTIAN LEUZ, RAGHURAM G. RAJAN

The average distance of U.S. banks from their small corporate borrowers increased before the global financial crisis, especially for banks in competitive counties. Small distant loans are harder to make, so loan quality deteriorated. Surprisingly, such lending intensified as the Fed raised interest rates from 2004. Why? We show that banks' responses to higher rates led bank deposits to shift into competitive counties. Short‐horizon bank management recycled these inflows into risky loans to distant uncompetitive counties. Thus, rate hikes, competition, and managerial short‐termism explain why inflows “burned a hole” in banks' pockets and, more generally, increased risky lending.

Evidence on the Benefits of Alternative Mortgage Products

Published: 7/16/2013,  Volume: 68,  Issue: 4  |  DOI: 10.1111/jofi.12049  |  Cited by: 83

JOÃO F. COCCO

Alternative mortgage products have been identified by many as culprits in the financial crisis. However, because of their lower initial mortgage payments relative to loan amount, they may be a valuable tool for households that expect higher and more certain future labor income, and that wish to smooth consumption over the life‐cycle. Using U.K. household‐level panel data, this paper provides evidence in support of this hypothesis and highlights other important benefits of alternative mortgages, including portfolio diversification, tax benefits, and a reduction in the transaction costs incurred in housing transactions.

Equilibrium Asset Pricing with Leverage and Default

Published: 11/23/2020,  Volume: 76,  Issue: 2  |  DOI: 10.1111/jofi.12987  |  Cited by: 67

JOÃO F. GOMES, LUKAS SCHMID

We develop a general equilibrium model linking the pricing of stocks and corporate bonds to endogenous movements in corporate leverage and aggregate volatility. The model features heterogeneous firms making optimal investment and financing decisions and connects fluctuations in macroeconomic quantities and asset prices to movements in the cross section of firms. Empirically plausible movements in leverage produce realistic asset return dynamics. Countercyclical leverage drives predictable variation in risk premia, and debt‐financed growth generates a high value premium. Endogenous default produces countercyclical aggregate volatility and credit spread movements that are propagated to the real economy through their effects on investment and output.

Bank Loans, Bonds, and Information Monopolies across the Business Cycle

Published: 5/9/2008,  Volume: 63,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2008.01359.x  |  Cited by: 314

JOÃO A. C. SANTOS, ANDREW WINTON

Theory suggests that banks' private information about borrowers lets them hold up borrowers for higher interest rates. Since hold‐up power increases with borrower risk, banks with exploitable information should be able to raise their rates in recessions by more than is justified by borrower risk alone. We test this hypothesis by comparing the pricing of loans for bank‐dependent borrowers with the pricing of loans for borrowers with access to public debt markets, controlling for risk factors. Loan spreads rise in recessions, but firms with public debt market access pay lower spreads and their spreads rise significantly less in recessions.

A Model of Mortgage Default

Published: 7/23/2015,  Volume: 70,  Issue: 4  |  DOI: 10.1111/jofi.12252  |  Cited by: 294

JOHN Y. CAMPBELL, JOÃO F. COCCO

In this paper, we solve a dynamic model of households' mortgage decisions incorporating labor income, house price, inflation, and interest rate risk. Using a zero‐profit condition for mortgage lenders, we solve for equilibrium mortgage rates given borrower characteristics and optimal decisions. The model quantifies the effects of adjustable versus fixed mortgage rates, loan‐to‐value ratios, and mortgage affordability measures on mortgage premia and default. Mortgage selection by heterogeneous borrowers helps explain the higher default rates on adjustable‐rate mortgages during the recent U.S. housing downturn, and the variation in mortgage premia with the level of interest rates.

Structuring Mortgages for Macroeconomic Stability

Published: 6/3/2021,  Volume: 76,  Issue: 5  |  DOI: 10.1111/jofi.13056  |  Cited by: 57

JOHN Y. CAMPBELL, NUNO CLARA, JOÃO F. COCCO

We study mortgage design features aimed at stabilizing the macroeconomy. We model overlapping generations of borrowers and an infinitely lived risk‐averse representative lender. Mortgages are priced using an equilibrium pricing kernel derived from the lender's endogenous consumption. We consider an adjustable‐rate mortgage with an option that during recessions allows borrowers to pay only interest on their loan and extend its maturity. The option stabilizes consumption growth over the business cycle, shifts defaults to expansions, and enhances welfare. The cyclical properties of the contract are attractive to a risk‐averse lender so that the mortgage can be provided at a relatively low cost.