Interest Rates, Competition, and Complexity: Demand and Supply of Retail Financial Products
Felix Fattinger1, Marc Chesney2, Jonathan Krakow2, Simon Straumann3
1Vienna University of Economics and Business & VGSF, Austria; 2University of Zurich, Switzerland; 3WHU Otto Beisheim School of Management, Germany
Discussant: Jean Paul Rabanal (University of Stavanger)
We study the post-Great Recession market for retail investment products. With an experiment, we show that low interest rates drive investment demand but not product differentiation. Elicited margins go hand in hand with investors’ underestimation of complex risk exposures. We empirically document that (i) rising complexity follows market growth, (ii) issuer margins increase in complexity, and (iii) simpler products first-order dominate more-complex products. Furthermore, biased dependency perceptions predict margins in the cross-section. Consistent with limited buy-side learning and growing sell-side competition, banks employ strategic price complexity to mitigate competitive pressure. Our findings showcase how low interest rates fuel excessive risk-taking.
Easy Screening: Inattention and Household Financial Distress
Sjoerd van Bekkum, Haikun Zhu
Erasmus University Rotterdam, The Netherlands
Discussant: Sebastian Doerr (Bank for International Settlements)
Using checking account transactions and credit line, term loan, and customer data from a North-American bank, we find that more inattentive customers are at greater risk of future financial distress. Inattention predicts future financial distress similar to internal and external credit risk models, in-sample and out-of-sample, and also for customers excluded from credit by conventional credit score providers. Our results can explain several "fintech facts," identify inattention as an important cause for future financial distress, and suggest checking account transactions as a newly available financial distress measure for banks and non-banks that enables more credit access without increasing borrower risk.
Do Investors Read the Fine Print? Salient Thinking and Security Design
Petra Vokata
Ohio State University, United States of America
Using a novel database of complex securities, I study how salient attributes of security design distort household investment decisions. I show banks add non-standard (fine-print) conditions to artificially increase advertised headline returns---a phenomenon I term "enhancement." Enhancement increases headline returns by 11 percentage points, on average, but does not increase realized returns. Flexibly controlling for all other product attributes and using high-frequency shocks to structuring costs of enhancement for identification, I find demand is highly elastic to enhancement. Enhancement is costly to investors: a one standard deviation decrease implies savings of more than $1 billion in fees.
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