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Essays in household finance

Robles Garcia, Claudia (2019) Essays in household finance. PhD thesis, The London School of Economics and Political Science (LSE).

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Abstract

This thesis consists of three essays on household finance and banking. The first chapter examines the role of brokers in the UK mortgage market. Mortgage brokers operate as intermediaries between households and lenders, acting as expert advisors for consumers and as distributors for mortgage providers. Using loan-level data from the universe of UK mortgage originations, I study the interactions between households, brokers and lenders. I find that, in this market, brokers often charge fees to households, while at the same time receiving commission payments from lenders for the sale of their products. The data suggest that these commissions can distort brokers' advice, potentially generating an agency problem between households and brokers. However, I also find evidence that brokers can benefit consumers by increasing upstream competition. By facilitating the entry of new, lower-cost mortgage providers, brokers increase competition among lenders, which can result in lower interest rates for households. It is important to understand both the positive and negative effects of having brokers when considering regulation in this market. The second chapter empirically analyzes the effects on welfare and market structure of regulations restricting broker compensation in the UK mortgage market. To study the net effect of these regulations in equilibrium, I estimate a structural model that features households' demand for mortgage products and broker services, lenders' optimal pricing decisions, and broker-lender bilateral bargaining over commission rates. I use the estimates to evaluate the impact of policies restricting brokers' commission payments. I find that a ban on commissions leads to a 25% decrease in consumer welfare, whereas a cap equal to the median commission increases consumer surplus by 10%. The intuition behind this finding is that by introducing a more restrictive cap, we are decreasing broker market power at the expense of increasing lender market power. A tighter cap will increase consumer surplus by aligning the incentives of brokers and households, but it will also decrease consumer surplus by reducing competition among lenders. In this chapter, I quantify both opposing forces to capture the net effect of different policies. The third chapter, co-authored with Nikos Artavanis, Daniel Paravisini, Amit Seru and Margarita Tsoutsoura, develops a new approach to isolate and quantify the extent to which deposit withdrawals are due to liquidity, exposure to policy risk, or expectations about how other depositors will behave. We use high frequency microdata on insured time-deposits from a large Greek bank over a long time period that spans quiet periods as well as events with large policy uncertainty. We use variation induced by maturity expiration of time deposits around the large policy uncertainty events to filter deposit withdrawals due to direct exposure to policy risk from those due to expectations about behavior of other depositors. In response to a policy uncertainty shock that doubled the short-run CDS price of Greek sovereign bonds, the early deposit withdrawal probability quadrupled. About two-thirds of this increase is driven by direct exposure to policy risk with the remainder due to changes in expectations of behavior of other depositors. We quantify these effects in terms of forgone interest rates and changes in short-run CDS prices. Our estimates imply effects that compare well with anecdotes from other recent prominent episodes of depositor withdrawals.

Item Type: Thesis (PhD)
Additional Information: © 2019 Claudia Robles Garcia
Library of Congress subject classification: H Social Sciences > HG Finance
Sets: Departments > Economics
Supervisor: Gavazza, Alessandro
URI: http://etheses.lse.ac.uk/id/eprint/3914

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