Matthew C. Plosser

Banks' Incentives and the Quality of Internal Risk Models

This paper investigates the incentives for banks to bias their internally generated risk estimates. We are able to estimate bank biases at the credit level by comparing bank-generated risk estimates within loan syndicates. The biases are positively correlated with measures of regulatory capital, even in the presence of bank fixed effects, consistent with an effort by low-capital banks to improve regulatory ratios. At the portfolio level, the difference in borrower probability of default is as large as 100 basis points, which can improve the typical loan portfolio’s Tier 1 capital ratio by as much as 33 percent. Congruent with a regulatory motive, the sensitivity to capital is greater for larger, riskier, and more opaque credits. In addition, we find that low-capital banks’ risk estimates have less explanatory power than those of high-capital banks with regard to the prices set on loans, indicating that low-capital banks not only have downward-biased risk estimates but that they also incorporate less information.

Buyout Activity: The Impact of Aggregate Discount Rates

We argue that buyout waves form in response to fluctuations in aggregate discount rates. In our model, discount rates alter the present value of cash flow improvements and the illiquidity premium demanded by buyout investors. We confirm our predictions empirically. Overall deal activity varies positively with the risk premium and negatively with the risk-free rate, exhibiting heterogeneous effects across firms. Cross-sectionally, firms with high levels of systematic risk or idiosyncratic risk are less likely targets. We decompose variation in activity structurally between changes in the value of cash flow and the illiquidity premium. The positive correlation of the two explains the wave behavior of activity.

Bank Heterogeneity and Capital Allocation: Evidence from 'Fracking' Shocks

This paper empirically investigates banks’ investment allocations over the recent business cycle. I identify unsolicited deposit shocks resulting from unconventional energy development and estimate bank allocations of these deposits. In the pre-recession period, banks lend 38 percent of incremental deposits; however, during the downturn, banks favor liquid assets and lending allocations fall to 22 percent. Banks with low risk tolerance or less access to liquidity are particularly sensitive to the decline in economic conditions, choosing securities and cash, respectively. The findings identify significant heterogeneity in the willingness of banks to allocate capital during adverse times.

A Primer on Unconventional Energy and Deposit Shocks

Unconventional energy development requires large payments to landowners resulting in significant increases in local bank deposits. This paper identifies counties impacted by unconventional energy development in the United States in order to analyze these unsolicited increases in bank deposits. I outline the methodology used to classify impacted counties and I characterize the behavior of local deposits. I conclude that the deposit shock is meaningful in magnitude, persistent, and unsolicited by banks.

Buyout Activity and Asset Prices

We develop a model in which leveraged buyout (LBO) transactions are sensitive to variation in pricing conditions. The privatization of the firm generates value by eliminating agency costs that impede the firm’s growth; however, LBO investors require compensation to commit their capital to a single, undiversified project. These quantities are derived in an economy with long-run risk and recursive preferences. We conclude that more buyouts should occur when risk-free rates are high and the risk premium is low. In a panel dataset of public companies from 1980 to 2009, we document that LBO activity is positively related to the risk-free rate and negatively related to expected excess returns. We find the aggregate discount rate, rather than credit specific factors, is an important determinant of LBO activity. We also predict firms with higher exposure to systematic shocks and higher idiosyncratic risk are less likely to LBO. In the data, we find firms are less likely to privatize if they have a high market beta, residual variance, or cash flow volatility.

The Role of Technology in Mortgage Lending

Technology-based (“FinTech�?) lenders increased their market share of U.S. mortgage lending from 2 percent to 8 percent from 2010 to 2016. Using market-wide, loan-level data on U.S. mortgage applications and originations, we show that FinTech lenders process mortgage applications about 20 percent faster than other lenders, even when controlling for detailed loan, borrower, and geographic observables. Faster processing does not come at the cost of higher defaults. FinTech lenders adjust supply more elastically than other lenders in response to exogenous mortgage demand shocks, thereby alleviating capacity constraints associated with traditional mortgage lending. In areas with more FinTech lending, borrowers refinance more, especially when it is in their interest to do so. We find no evidence that FinTech lenders target marginal borrowers. Our results suggest that technological innovation has improved the efficiency of financial intermediation in the U.S. mortgage market.