Marco A. Espinosa-Vega

Why do borrowers pledge collateral? New empirical evidence on the role of asymmetric information

An important theoretical literature motivates collateral as a mechanism that mitigates adverse selection, credit rationing, and other inefficiencies that arise when borrowers hold ex ante private information. There is no clear empirical evidence regarding the central implication of this literature—that a reduction in asymmetric information reduces the incidence of collateral. We exploit exogenous variation in lender information related to the adoption of an information technology that reduces ex ante private information, and compare collateral outcomes before and after adoption. Our results are consistent with this central implication of the private-information models and support the empirical importance of this theory.

Debt Maturity, Risk, and Asymmetric Information

We test the implications of Flannerys (1986) and Diamonds (1991) models concerning the effects of risk and asymmetric information in determining debt maturity, and we examine the overall importance of informational asymmetries in debt maturity choices. We employ data on over 6,000 commercial loans from 53 large U.S. banks. Our results for low-risk firms are consistent with the predictions of both theoretical models, but our findings for high-risk firms conflict with the predictions of Diamonds model and with much of the empirical literature. Our findings also suggest a strong quantitative role for asymmetric information in explaining debt maturity.

Cross-border financial surveillance: a network perspective

Effective cross-border financial surveillance requires the monitoring of direct and indirect systemic linkages. This paper illustrates how network analysis could make a significant contribution in this regard by simulating different credit and funding shocks to the banking systems of a number of selected countries. After that, we show that the inclusion of risk transfers could modify the risk profile of entire financial systems, and thus an enriched simulation algorithm able to account for risk transfers is proposed. Finally, we discuss how some of the limitations of our simulations are a reflection of existing information and data gaps, and thus view these shortcomings as a call to improve the collection and analysis of data on cross-border financial exposures.

Retail Bank Interest Rate Pass-Through: Is Chile Atypical?

This paper investigates empirically the pass-through of money market interest rates to retail banking interest rates in Chile, the United States, Canada, Australia, New Zealand, and five European countries. Overall, Chile’s pass-through does not appear atypical. Based on a standard errorcorrection model, we find that, as in most countries considered, Chile’s measured pass-through is incomplete. But Chile’s pass-through is also faster than in many other countries considered and is comparable to that in the United States. While we find no significant evidence of asymmetry in Chile’s pass-through across states of the interest rate or monetary policy cycle, we do find some evidence of parameter instability, around the time of the Asian and Russian crises. However, we do not find evidence that the switch to a more flexible exchange rate regime in 1999 and the “nominalization” of Chile’s interest rate targets in 2001 have affected significantly the pass-through process.

Housing Finance and Mortgage-Backed Securities in Mexico

This paper reviews the Mexican experience with the securitization of residential mortgages. It highlights the key legislative and institutional reforms leading to the development of primary and secondary mortgage markets and reports the main features and valuation practices of the RMBS markets. The paper identifies areas warranting close attention to improve the outlook for the Mexican RMBS market and draws some lessons from the recent U.S. subprime mortgage market problems.

Barriers to International Capital Flows: When, Why, How Big, and for Whom?

Until recently, the trend in world capital markets has been toward increasing ?globalization.? Recent events in Latin America and Asia have forced a rethinking of the desirability of unrestricted world capital flows. In this paper we ask whether simple restrictions on capital mobility can succeed in reducing the volatility of funds flows, whether such restrictions are consistent with the long-term development of the countries that might impose them, whether such restrictions are beneficial for poorer countries while harming wealthier countries, and whether barriers to capital movements should be reduced in magnitude as the development process proceeds. ; We find first that appropriately selected barriers to capital movements can be used by a poorer country to eliminate the short-term volatility of capital flows and other economic volatility as well. Second, we find that these barriers are consistent with increased rather than reduced levels of economic development in both the short and long run. Third, we show that it is empirically plausible that such barriers will be reduced over time as economies develop. Fourth, we show that, in the long run, all countries can benefit from the presence of barriers to capital mobility. And, fifth, we show that barriers to capital mobility can increase the magnitude of net capital flows in a steady state.

Socially Excessive Bankruptcy Costs and the Benefits of Interest Rate Ceilings on Loans

The authors study the capital accumulation and welfare implications of ceilings on loan interest rates in a dynamic general equilibrium model. Binding ceilings on loan rates reduce the probability of bankruptcy. Lower bankruptcy rates result in lower bankruptcy and liquidation costs. The authors state conditions under which the resources freed by this cost-saving result increase the steady state capital stock, reduce steady state credit rationing, and raise the steady state welfare of all agents. The authors also argue that the conditions stated are likely to be satisfied in practice. Finally, their results hold even if initially there is capital over-accumulation.

Interconnectedness, Systemic Crises and Recessions

This relatively simple model attempts to capture and integrate four widely held views about financial crises. [1] Interconnectedness among financial institutions (banks) can play a major role in precipitating systemic financial crises. [2] Lack of information about the quality of bank portfolios also plays a role in precipitating systemic crises. [3] Financial crises, particularly systemic ones, are often followed by severe, lengthy recessions. [4] Loss of confidence in the financial system is partly responsible for the length and severity of these recessions. In the model, banks make decisions about initiating and liquidating risky loans. Interconnectedness among their asset portfolios can obscure information about these portfolios, causing them to make inefficient decisions about liquidation, and about retention of the managers who assess credit risk. These decisions can increase the depth of recessions, and they can produce systemic financial crises. They can also reduce the effectiveness of future bank risk assessment, increasing the probability of lengthy, severe recessions. The government, acting in the interest of current and future depositors, may wish to increase the transparency of bank portfolios by limiting interconnectedness. The optimal degree of regulation, which may depend on depositors’ degree of risk aversion, may not eliminate financial crises.

Barriers to Capital Accumulation and the Incidence of Child Labor

The World Bank documents an inverse relationship between GDP per-capita and child labor participation rates. We construct a life-cycle model with human and physical capital in which parents make a time allocation choice for their child. The model considers two features that have shown potential in explaining differences in states of development across nations. These are: i) a minimum consumption requirement, and ii) barriers to physical capital accumulation. We find the introduction of capital barriers alone is not enough to replicate the aforementioned observation by the World Bank. However, we find the interplay of a minimum consumption requirement and barriers to capital may enhance our understanding of child labor, human capital, and the poverty of nations. Additionally, we find support for policies aimed at reducing capital barriers as means to reduce child labor over an out and out ban on it.