Lamont K. Black

The Effect of TARP on Bank Risk-Taking

One of the largest responses of the U.S. government to the recent financial crisis was the Troubled Asset Relief Program (TARP). TARP was originally intended to stabilize the financial sector through the increased capitalization of banks. However, recipients of TARP funds were then encouraged to make additional loans despite increased borrower risk. In this paper, we consider the effect of the TARP capital injections on bank risk taking by analyzing the risk ratings of banks’ commercial loan originations during the crisis. The results indicate that, relative to non-TARP banks, the risk of loan originations increased at large TARP banks but decreased at small TARP banks. Interest spreads and loan levels also moved in different directions for large and small banks. For large banks, the increase in risk-taking without an increase in lending is suggestive of moral hazard due to government ownership. These results may also be due to the conflicting goals of the TARP program for bank capitalization and bank lending.

Bank Loan Supply Responses to Federal Reserve Emergency Liquidity Facilities

The Federal Reserve injected unprecedented liquidity into banks during the recent financial crisis using the discount window and Term Auction Facility. We examine these facilities’ use and effectiveness and have three main findings. First, small bank users were generally weak, large bank users were not. Second, the funds were weak substitutes to other funding sources. Third, these facilities increased aggregate lending, enhancing lending at expanding banks and reducing decline at contracting banks. Small banks increased small business lending, while large banks enhanced large business lending. Loan quality only improved at small banks, while both left loan contract terms unchanged.The Federal Reserve injected unprecedented liquidity into banks during the recent crisis through the discount window and Term Auction Facility. We examine the use and effectiveness of these facilities. We find that recipient banks increased their lending overall, both short- and long-term, and in most loan categories. The facilities resulted in enhanced lending at expanding banks and reduced declines at contracting banks. Small banks increased small business lending and large banks increased large business lending. There were no significant changes in loan quality or loan contract terms by either large or small banks.

Differences Across Originators in CMBS Loan Underwriting

There is considerable heterogeneity in the organizational structures of CMBS loan originators and in their incentives for underwriting risky loans. We treat an originators organizational type - commercial bank, investment bank, insurance company, finance company, conduit lender, or foreign-owned entity - as a proxy for incentives related to warehousing risk and balance-sheet lending. After controlling for observable credit characteristics of over 30,000 loans securitized into CMBS since 1999, we find considerable differences in loan performance across originator types. The results suggest that moral hazard - captured by lack of warehousing risk - negatively affected the quality of loans underwritten by conduit lenders. On the other hand, despite the potential for engaging in adverse selection, balance-sheet lenders - commercial banks, insurance companies and finance companies - actually underwrote higher-quality loans.

The Cross-Market Spillover of Economic Shocks Through Multi-Market Banks

This study investigates the mortgage lending of banks operating in multiple U.S. metropolitan areas during the housing market collapse of 2007–09. We show that multimarket banks reduced local portfolio lending in response to high overall mortgage delinquencies in their other markets, consistent with the view that local economic shocks can be transmitted to other regions through banks’ internal capital markets. This spillover was greatest when the bank lacked a branch presence and when the market was highly peripheral to the bank in terms of its total mortgage lending. These effects were not fully offset by securitization or other portfolio lenders.

The Effect of Monetary Policy on the Availability of Credit: How the Credit Channel Works

The recent financial turmoil renewed interest in whether monetary policy affects the supply side of the credit market. We show that this credit channel exists — monetary policy affects aggregate loan supply (bank lending channel) and redistributes loan supply across different-sized firms (balance sheet channel). The effect on aggregate loan supply is driven by banks altering loan maturity, so monetary policy takes time to impact loan supply. Policy loosening associated with recessions, including the recent one, increased loan supply after about one year. In the cross-section, the impact is at least as strong for large banks as for small banks.

The Cross‐Market Spillover of Economic Shocks through Multimarket Banks

This study investigates the mortgage lending of banks operating in multiple U.S. metropolitan areas during the housing market collapse of 2007–09. We show that multimarket banks reduced local portfolio lending in response to high overall mortgage delinquencies in their other markets, consistent with the view that local economic shocks can be transmitted to other regions through banks’ internal capital markets. This spillover was greatest when the bank lacked a branch presence and when the market was highly peripheral to the bank in terms of its total mortgage lending. These effects were not fully offset by securitization or other portfolio lenders.

Public Service or Private Benefits? Bankers in the Governance of the Federal Reserve System

Federal Reserve Banks are private corporations with boards of directors and one-third of the seats on each board are held by bankers. We investigate whether these directorships create value for banks elected between 1986 and 2013 and through what channels. The announcement of a banker’s appointment to the board of directors of a Federal Reserve Bank produces a roughly 1% cumulative abnormal return in the bank’s stock price. We find evidence consistent with value being created through certification or implicit guarantees, and access to private information about monetary policy. We do not find evidence of increased regulatory leniency.

Safe Collateral, Arm's-Length Credit: Evidence from the Commercial Real Estate Mortgage Market

When collateral is safe, there are less opportunities for things to go wrong. We examine matching between collateral and creditors in the commercial real estate mortgage market by comparing loans in commercial mortgage backed securities (CMBS) conduits and bank portfolios. We model CMBS financing as lower cost but less informed, such that only safe collateral is funded by CMBS. This prediction is tested using the 2007-2009 shutdown of the CMBS market as a natural experiment. The loans funded by banks that would have been securitized are less likely to default or be renegotiated, indicating that the securitization channel, when available, funds safe collateral.