Sergio Mayordomo

Borrowing Constraints and Housing Price Expectations in the Euro Area

This paper analyzes the importance of financial constraints on the home ownership decision of European households and their differential effect in periods of positive expectations of housing prices. We document that financial constraints are key drivers of the household homeownership decision being wealth constraints more relevant than income constraints. The wealth constraint is less binding under a scenario in which housing prices exhibit an upward trend.

When does relationship lending start to pay

This paper empirically characterizes relationship lending using data from more than 20,000 loans of a Spanish bank to small and medium enterprises (SMEs). The study analyzes the pricing determinants of loans to firms based on the entire previous bank–firm relationship, allowing for the identification of nonlinear pricing patterns in the bank–firm relationship. We show that firms only start capitalizing the gains of relationship lending when the relationship extends beyond two years. This reduction in the loan rate spread charged is driven by the opaque firms, for which the acquisition of “soft” information is especially relevant. Finally, we find that relationship lending significantly mitigates the increased costs of refinancing loans along two dimensions: relationship duration and having additional contracts—other than loans—with the bank.

Short-Sale Constraints and Financial Stability: Evidence from the Spanish Market

We examine the effect of the short-selling ban in 2011 on Spanish stocks on the level of risk in the banking sector. Before the ban, short positions were found to be positive and significantly related to the creditworthiness of medium-sized banks, these being generally less internationally diversified and more reliant on official support. We show that the ban helped stabilise the credit risk of medium-sized banks, especially those more exposed to short-sellers’ activity, but not that of large banks and non-financial corporations. This stabilising effect came at the cost of a significantly sharp decline in liquidity, trading and price efficiency of medium-sized banks’ stocks relative to other stocks.

A New Test of Statistical Arbitrage with Applications to Credit Derivatives Markets

This paper presents a new statistical arbitrage test which has lower Type I error and selects arbitrage opportunities with lower downside risk than existing alternatives. The test is applied to credit derivatives markets using strategies combining Credit Default Swaps (CDS) and Asset Swaps. Using four different databases (GFI, Reuters, CMA and JP Morgan) from 2005 to 2009, we find persistent mispricings between the CDS and Asset Swap spreads before and during the current financial crisis. These mispricings appear to offer arbitrage opportunities if a standard statistical arbitrage test is employed. However, our test shows that after considering funding and trading costs, these mispricings are unlikely to provide profitable arbitrage opportunities.

Disentangling the Effects of Household Financial Constraints and Risk Profile on Mortgage Rates

In this paper we disentangle the impact of household financial constraints on the mortgage rate from a number of dimensions of credit risk. The constraints employed in our analysis depend on the desired home value and not on the purchase price, as otherwise constraints would be specific to homeowners, whereas we deal with renters and owners through the Heckman selection model. This analysis relies on a dataset that contains information on the economic and financial decisions of Spanish households in four different years: 2002, 2005, 2008, and 2011. Our results suggest that banks’ profitable customers are able to bargain for lower mortgage rates. However, contrary to other studies, the risk profile does not have a significant effect on interest rates. Credit institutions tend to charge higher rates during the crisis to all customers, irrespective of their risk profiles.

Dealing with Dealers: Sovereign CDS Comovements

We show that sovereign CDS that have common dealers tend to be more correlated, especially when the dealers display similar quoting activity in those contracts over time. This commonality in dealers’ activity is a powerful driver of CDS comovements, over and above fundamental similarities between countries, including default, liquidity, and macro factors. We posit that the mechanism causing the excess correlation is the buying pressure faced by CDS dealers for credit enhancements and regulatory capital reliefs. An instrumental variable analysis confirms that our findings are indeed rooted in a causal relationship.

'Keeping It Personal' or 'Getting Real'? On the Drivers and Effectiveness of Personal versus Real Loan Guarantees

This paper studies the effects of the bank capital requirements imposed by the European authorities in October 2011 on loan collateral and personal guarantees usage to enhance capital ratios. We use detailed information on the loan contracts granted by a representative Spanish bank and several subsidiaries to nonfinancial corporations around that date. We document that personal guarantees usage increases more than that of collateral, especially at subsidiaries with lower capital ratios. However, although the former type of guarantees demonstrably disciplined firms in their risk-taking before 2011, their subsequent overuse may have blunted their impact and may have even undermined firm performance and investment.

'Support Is Appreciated': On the Effectiveness of the SME Supporting Factor

The introduction of the SME Supporting Factor (SF) allows banks to reduce capital requirements for credit risk on exposures to SME. This means that banks can free up capital resources that can be redeployed in the form of new loans. Our study documents that the SF alleviates credit rationing for medium-sized firms that are eligible for the application of the SF but not for micro/small firms. These results suggest that European banks were aware of this policy measure and optimized both their regulatory capital and their credit exposures by granting loans to the medium-sized firms, which are safer than micro/small firms.