Template-Type: ReDIF-Paper 1.0
Author-Name: Leonardo Gambacorta
Author-X-Name-First: Leonardo
Author-X-Name-Last: Gambacorta
Author-Name: Luigi Guiso
Author-X-Name-First: Luigi
Author-X-Name-Last: Guiso
Author-Name: Paolo Emilio Mistrulli
Author-X-Name-First: Paolo Emilio
Author-X-Name-Last: Mistrulli
Author-Name: Andrea Pozzi
Author-X-Name-First: Andrea
Author-X-Name-Last: Pozzi
Author-Name: Anton Tsoy
Author-X-Name-First: Anton
Author-X-Name-Last: Tsoy
Title: The cost of steering in financial markets: evidence from the mortgage market
Abstract: We build a model of the mortgage market where banks attain their optimal mortgage portfolio by setting rates and "steering" customers. "Sophisticated" households know which mortgage type is best for them, while "naïve" ones are susceptible to steering by their banks. Using data on the universe of Italian mortgages, we estimate the model and quantify the welfare implications of steering. The analysis shows that banks' steering activity could generate distortions, with welfare effects that vary between households depending on their degree of sophistication. However, the introduction of measures to restrict the scope for banks to steer their customers would not necessarily increase household welfare, because such activities, even if potentially distortive, may also contain useful information. By contrast, a financial literacy campaign always has a beneficial effect on the welfare of naïve households, which are proportionately more exposed to the risk of taking inappropriate financial decisions.
Length: 71 pages
Creation-Date: 2019-12
File-URL: https://www.bis.org/publ/work835.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work835.htm
File-Format: text/html
Number: 835
Classification-JEL: G21, D18, D12
Keywords: steering, financial advice, mortgage market, consumer protection
Handle: RePEc:bis:biswps:835