The supply side of household finance

We propose a new, data-based test for the presence of biased financial advice when households choose between fixed and adjustable rate mortgages. If households are wary, the relative cost of the two types should be a sufficient statistic for a household contract choice: the attributes of the bank that makes the loan should play no role. If households rely on banks' advice to guide their choice, banks may be tempted to bias their counsel to their own advantage. In this case bank-specific supply characteristics will play a role in the household's choice above any role they play through relative prices. Testing this hypothesis on a sample of 1.6 million mortgages originated in Italy between 2004 and 2010, we find that the choice between adjustable and fixed rates is significantly affected by change in banks' supply factors, especially in periods during which banks do not change the relative price of the two mortgage types. This supports the view that banks are able to affect customers' mortgage choices not only by pricing but also through an advice channel.