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• Article | Journal of Economic Perspectives | Spring 2013

  The Growth of Finance

  Robin Greenwood and David S. Scharfstein

  The U.S. financial services industry grew from 4.9% of GDP in 1980 to 7.9% of GDP in 2007. A sizeable portion of the growth can be explained by rising asset management fees, which in turn were driven by increases in the valuation of tradable assets, particularly equity. Another important factor was growth in fees associated with an expansion in household credit, particularly for residential mortgages. This expansion was itself fueled by the development of non-bank credit intermediation (or "shadow banking"). Whether the growth of the financial sector has been socially beneficial depends on one's view of active asset management, the increase in household credit, and the growth of shadow banking. While recognizing some of the benefits of professional asset management, we are skeptical about the marginal value of active asset management. We then raise concerns about whether the potential benefits of increased access to household credit—the main output of the shadow banking system—are outweighed by the risks inherent in this new approach to credit delivery.

  Keywords: Asset Management; Research; Finance; Mortgages; Financial Services Industry;

  Citation:

  Greenwood, Robin, and David S. Scharfstein. "The Growth of Finance." Journal of Economic Perspectives (Spring 2013): 3–28.

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• Mimeo | 2013

  Concentration in Mortgage Lending, Refinancing Activity, and Mortgage Rates

  David S. Scharfstein and Adi Sunderam

  We present evidence that high concentration in local mortgage lending reduces the sensitivity of mortgage rates and refinancing activity to mortgage-backed security (MBS) yields. A decrease in MBS yields is typically associated with greater refinancing activity and lower rates on new mortgages. However, this effect is dampened in counties with concentrated mortgage markets. We isolate the direct effect of mortgage market concentration and rule out alternative explanations based on borrower, loan, and collateral characteristics in two ways. First, we use a matching procedure to compare high- and low-concentration counties that are very similar on observable characteristics and find similar results. Second, we examine counties where concentration in mortgage lending is increased by bank mergers. We show that within a given county, sensitivities to MBS yields decrease after a concentration-increasing merger. Our results suggest that the effectiveness of housing as a monetary policy transmission channel varies in both the time series and the cross section. Increasing concentration by one standard deviation above the mean reduces the overall impact of a decline in MBS yields by approximately 50%.

  Keywords: Mortgages; Banking Industry; United States;

  Citation:

  Scharfstein, David S., and Adi Sunderam. "Concentration in Mortgage Lending, Refinancing Activity, and Mortgage Rates." April 2013. Mimeo.

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• Working Paper | 2013

  An Evaluation of Money Market Fund Reform Proposals

  Samuel G. Hanson, David S. Scharfstein and Adi Sunderam

  We analyze the leading reform proposals to address the structural vulnerabilities of money market mutual funds (MMFs). We assume that the main goal of MMF reform is safeguarding financial stability. In light of this goal, reforms should reduce the ex ante incentives for MMFs to take excessive risk and increase the ex post resilience of MMFs to system-wide runs. Our analysis suggests that requiring MMFs to have subordinated capital buffers could generate significant financial stability benefits. Subordinated capital provides MMFs with loss absorption capacity, lowering the probability that a MMF suffers losses large enough to trigger a run, and reduces incentives to take excessive risks. We estimate that a capital buffer in the range of 3 to 4% would significantly reduce the probability that ordinary MMF shareholders ever suffer losses. In exchange for having the safer investment product made possible by subordinated capital, the yield paid to ordinary MMFs shareholders would decline by only 0.05%. Other reform alternatives such as converting MMFs to a floating NAV would likely be less effective in protecting financial stability.

  Citation:

  Hanson, Samuel G., David S. Scharfstein, and Adi Sunderam. "An Evaluation of Money Market Fund Reform Proposals." Working Paper.

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