February 23, 2015, 12:30–14:00
Room MF 323
Fédération des Banques Françaises Seminar
Abstract
We propose a new, data-based test for the presence of biased financial advice when households choose between Fixed Rate Mort- gages (FRM) and Adjustable Rate Mortgages (ARM). If households are wary, the relative cost of FRM and ARM should be a sufficient statistic for a household contract choice: the identity of the bank originating the loan should play no role. If households rely on banks’ advice to guide their choice, banks may be tempted to bias advice in a direction that is most convenient to them, so that bank-specific characteristics play a role in the choice of household contract. We test this implication on the sample of 1.6 million mortgages originated in Italy between 2004 and 2010. We find that the choice between ARM and FRM is significantly affected by banks ‘characteristics, especially over intervals of time during which banks do not change the relative price of the two mortgage types. This supports the view that banks are able to affect household mortgage choices not only through price but also through an advice channel.