The Cost of Steering in Financial Markets: Evidence from the Mortgage Market

71 Pages Posted: 15 Jan 2020

See all articles by Leonardo Gambacorta

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF)

Paolo Emilio Mistrulli

Bank of Italy

Andrea Pozzi

Einaudi Institute for Economics and Finance (EIEF)

Anton Tsoy

University of Toronto - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: December 19, 2019

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.

Keywords: steering, financial advice, mortgage market, consumer protection

JEL Classification: G21, D18, D12

Suggested Citation

Gambacorta, Leonardo and Guiso, Luigi and Mistrulli, Paolo Emilio and Pozzi, Andrea and Tsoy, Anton, The Cost of Steering in Financial Markets: Evidence from the Mortgage Market (December 19, 2019). BIS Working Paper No. 835, Available at SSRN: https://ssrn.com/abstract=3506954

Leonardo Gambacorta (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Sallustiana 62
Rome, 00187
Italy
+39 06 4792 4858 (Phone)
+39 06 4792 4872 (Fax)

HOME PAGE: http://www.eief.it/faculty-visitors/faculty-a-z/luigi-guiso/

Paolo Emilio Mistrulli

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Andrea Pozzi

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

Anton Tsoy

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S3G7
Canada

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