Martin Brown

We examine how the numeracy level of employees influences the quality of their on-the-job decisions. Based on an administrative dataset of a retail bank we relate the performance of loan officers in a standardized math test to the accuracy of their credit assessments of small business borrowers. We find that loan officers with a high level of numeracy are more accurate in assessing the credit risk of borrowers. The effect is most pronounced during the pre-crisis credit boom period when it is arguably more difficult to pick out risky borrowers.

We study retail deposit withdrawals from commercial banks that were differentially exposed to distress during the 2007-2009 financial crisis. We show that the propensity of clients to withdraw deposits increases with the severity of bank distress. However, an exclusive pre-crisis bank-client relationship eliminates withdrawal risk. The mechanism through which strong bank-client relationships mitigate withdrawal risk relates to the transaction costs of switching accounts rather than informational rents or differentiated services. Our findings provide empirical support to the Basel III liquidity regulations that emphasize the role of well-established client relationships for the stability of bank funding.

We study the impact of borrowing constraints on home ownership and housing demand by comparing the tenure choice and housing quality of consumers who receive intra‐family wealth transfers to those that do not. Our analysis is based on household‐level panel data providing information on the receipt of wealth transfers, changes in tenure status as well as changes in the size and quality of housing. On average we find that the receipt of a wealth transfer increases the propensity of consumers to transition from renters to home‐owners by 6–8 percentage points (35% of the sample mean). Additional analyses suggest that this effect is unlikely to be driven by wealth effects and can thus be attributed to the relaxation of borrowing constraints. By contrast, wealth transfers do not increase the likelihood that existing homeowners “trade‐up” to larger homes in better locations.

We investigate to what extent corporate governance and risk management mitigate the involvement of banks in credit boom and bust cycles. We study a unique, hand-collected dataset covering 156 banks from Central and Eastern Europe during 2005–2012. We document that stronger risk management is associated with more moderate pre-crisis credit growth but not with fewer credit losses in the crisis. With respect to bank governance, we find that a higher share of foreign members on the supervisory board is associated with less rapid credit growth in the pre-crisis period and a lower level of credit losses during the crisis period.

We exploit variation in consumer price inflation across seventy-one Russian regions to examine the relationship between the perceived stability of the domestic currency and financial dollarization. Our results show that regions with higher inflation experience an increase in the dollarization of household deposits and a decrease in the dollarization of loans. The impact of inflation on credit dollarization is weaker in regions with less integrated banking markets. This suggests that the currency-portfolio choices of households and firms are constrained by the asset-liability management of banks.

We study experimental coordination games to examine through which transmission channels, and under which information conditions, a panic-based depositor-run at one bank may trigger a panic-based depositor-run at another bank. We find that withdrawals at one bank trigger withdrawals at another bank by increasing players' beliefs that other depositors in their own bank will withdraw, making them more likely to withdraw as well. Importantly though, observed withdrawals affect depositors' beliefs, and are thus contagious, only when depositors know that there are economic linkages between their bank and the observed bank.

We examine how the geographical proximity to a microfinance bank affects financial inclusion. We study the expansion of the branch network of ProCredit banks in South-East Europe between 2006 and 2010. We report three main findings: First, ProCredit is more likely to open a new branch in areas with a large share of low-income households. Second, in locations where ProCredit opens a new branch the share of banked households increases more than in locations where it does not open a new branch. Third, this increase is particularly strong among low-income households, older households, and households which rely on transfer income.

We examine to what extent mortgage lending is characterized by strong relationships between banks and their borrowers. Our analysis is based on detailed survey data covering all current bank relations for a sample of 1,481 Swiss households out of which 687 have a mortgage. We document that mortgage borrowers maintain significantly more bank relations than comparable households without a mortgage. However, this does not imply that mortgage relations are loose. Comparing mortgage relations to other bank relations of the same households we find that mortgage relations are used for a broader scope of transactions and are held with banks that are located closer to the household. Examining the heterogeneity of mortgage relations across households, we find that financially sophisticated households are less likely to hold their mortgage with a local bank.

Implicit contracts can mitigate moral hazard in labor, credit and product markets. The enforcement mechanism underlying an implicit contract is the threat of exclusion: the agent fears that he will lose future income if the principal breaks off the relationship. This threat may be very weak in environments where an agent can appropriate income-generating resources provided by the principal. For example, in credit markets with weak creditor protection borrowers may be able to appropriate borrowed funds and generate investment income without requiring further loans. We examine implicit contracting in a lending experiment where the threat of exclusion is exogenously varied. We find that weak exclusion undermines implicit contracting: it leads to a more frequent breakdown of credit relationships as well as to smaller loans.

Theoretical and empirical work on banking emphasizes the role of banks in overcoming information asymmetries and agency problems between borrowers and lenders. This paper investigates the importance of bank ownership in determining the sorts of customers that a bank serves, and consequently, the sorts of information problems a bank lender chooses to address. Using survey data for over 16,500 households from 19 emerging economies in Central and Eastern Europe in 2010 this paper is the first to document that information asymmetries in the retail credit market lead foreign banks to cherry-pick financially transparent clients in similar ways as documented previously for enterprise credit. First, a higher market share of foreign banks in a country is associated with a larger gap in credit use between households with and without formal employment. Second, among mortgage borrowers, clients of foreign banks are more likely to be formally employed, are more likely to have personal assets, and are richer than clients of domestic banks. Third, consistent with these results, retail lending techniques of foreign banks rely more on financial information and collateral than those of domestic banks.