Abstract
The banking industry plays a critical role in the modern economic world, with lending being one of the most important services rendered by banks and having vital implications for social and economic welfare. Specifically, mortgage lending is crucial in shaping households' living standards while corporate lending has a decisive role in enhancing real economic activity and promoting a country’s economic growth. This Thesis consists of three chapters which study three separate topics in the area of bank lending (mortgage loans and corporate loans). In Chapter 1, entitled "Lending discrimination across the U.S.: New methodology and the role of the subprime crisis", we examine whether discrimination in mortgage-loan origination and pricing exists, and if so, whether the level of discrimination differ before and after the eruption of the subprime crisis. Using data from 6.5 million loan applications from 2004 through 2013, we propose a novel approach aiming to substantially lower the notorious omitted-variable bias of the Home Mortgage Disclosure Act (HMDA) database and identify the level of racial, ethnic, and gender discrimination in mortgage lending across the United States. In stark contrast with previous studies, we find, on average, very little discrimination in loan origination. Although discrimination increases somewhat after 2007, its probability remains well below 1%. In contrast, we find that white (non-Hispanic) applicants pay a lower spread on the originated loans by 0.37 (0.11) basis points, a result that almost entirely comes from the pre-crisis period. A key policy to limit the possibility of bank runs is an explicit deposit insurance scheme (DIS), which can be either privately or government-funded. In Chapter 2, entitled "Blessing or curse? Government funding of deposit insurance and corporate lending", we study the effect of government involvement in explicit DIS funding on price and non-price characteristics of loans. Using syndicated loans from 63 countries over 1985-2016, we show that changes in DIS from purely private-funded to either government-funded or jointly-funded increase all-in-drawn spreads by approximately 4.6%, further increase loan fees, decrease loan maturity, and increase the use of performance pricing provisions. Our findings are consistent with the moral hazard problem behind government-funded explicit DIS. In Chapter 3, entitled "Creditor rights and corporate lending revisited", we challenge the conventional finding that stronger legal protection of creditors improves the terms of corporate loan deals. Using global syndicated loan data from 1986 to 2005, we revisit the effect of creditor rights on corporate loan terms (spread, amount, and maturity). Instead of focusing only on cross-country differences, we also investigate within-country variation in creditor rights index by using country fixed effects and event-study methodologies. In stark contrast with previous findings, we find that the level of creditors’ protection does not significantly affect banks’ decisions on corporate loan terms. Our findings highlight that strengthening creditors’ protection is not necessarily an appropriate mechanism for promoting more competitive lending terms.