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Hutchins Roundup: Distressed banks, housing and black wealth, and more

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Studies in this week’s Hutchins Roundup find that distressed banks didn’t gamble for resurrection, black families paid more rent but had deteriorating home values early in the Great Migration, and more.

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Authors

Vivien Lee

Senior Research Assistant - Hutchins Center on Fiscal & Monetary Policy, The Brookings Institution

Michael Ng

Research Analyst - Hutchins Center on Fiscal and Monetary Policy, The Brookings Institution

Distressed banks didn’t gamble for resurrection in the 1980s or 2000s

Itzhak Ben-David and René M. Stulz of The Ohio State University and Ajay A. Palvia of the Comptroller of the Currency find that financially distressed banks don’t try to gamble their way out of trouble by making riskier loans or investments, but instead act to decrease their debt and raise additional equity. Using a panel dataset of over 23,000 banks, the authors study how banks responded to distress during two distinct periods: 1985-1994 and 2005-2014, both of which included financial crises (the savings and loan crisis of the late 1980s and the financial crisis of 2008). During both periods, banks facing financial trouble increased their equity capital ratios sharply and also cut dividends, lending, employment, and deposits. The authors note that despite large differences in regulation between periods, the extent of deleveraging was similar, suggesting that economic forces beyond formal regulation incentivize bank managers to deleverage when their banks are in distress. Their findings go against traditional narratives that to get out of financial distress, banks often double down by making riskier loans.

Early in the Great Migration, black families paid more rent but had deteriorating home values

Prottoy Akbar of the University of Pittsburgh and coauthors find that in northern cities prior to World War II, black families paid more in rent than white families for  similar housing while the  homes blacks purchased rapidly declined in value. The authors link the 1930 and 1940 censuses to construct a dataset of rents, home values, and racial composition of city blocks in ten major U.S. cities. Comparing city blocks that transitioned to majority-black with city blocks that remained largely white, they find that house prices on transitioned blocks rose about 11% less than prices on non-transitioned blocks, but rents on transitioned blocks increased by 37% more. Further, rents increased only for black families on these blocks, and not for white families who remained, the authors find. The effect was strongest in cities with the highest rates of black migration—houses on transitioned blocks lost 54% of their value relative to housing on non-transitioned blocks. The findings suggest that residential segregation eroded black wealth.

More student debt leads borrowers to prefer higher wages over job satisfaction

Student debt changes how people decide between wages and non-pecuniary benefits like work satisfaction when choosing a job, argue Mi Luo of Emory University and Simon Mongey of the University of Chicago. Using microdata from the National Center for Education Statistics, the authors find that higher student debt leads to higher wages, lower job satisfaction, shorter unemployment durations out of college, and lower rates of employment in low-paying public interest jobs. They estimate that on average, a worker in a low satisfaction job would be willing to forego 6% of lifetime consumption to move to a high satisfaction job of the same wage. The authors also show that the less pressing payment requirements of income-based repayment plans allow students to take jobs with higher job satisfaction. This suggests that if amenities are not considered, policymakers would mistakenly conclude that students prefer fixed-repayment plans over income-based repayment, the authors say.

Chart of the week: US job vacancy rate outpaces hires rate

Vacancy and hires

Quote of the week:

“Inflation is difficult to measure precisely. I don’t share the concern that some have that if we are at 1.8% inflation for a significant period of time, this is a problem that necessarily needs to be fixed. From my point of view, 1.8% is 2[%],” says Randal Quarles, vice chair for supervision of the Federal Reserve Board.

“We’ve set 2% as the target and we just don’t measure inflation precisely enough to know that we are hitting our target…And so I would not undergo heroics, like changing the Fed’s monetary policy regime or applying fresh stimulus, just to push inflation back up to 2%.”

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