GSIB Surcharges and Bank Lending: Evidence from U.S. Corporate Loan Data (with I. Ivanov and M. Rezende)

Journal of Financial Economics (forthcoming)

Capital surcharges on global systemically important banks (GSIBs) decrease lending to firms but do not have any real effects. Banks subject to higher surcharges reduce loan commitments relative to other banks. In response to surcharges, GSIBs also lower their estimates of firm risk. Firms’ total borrowing, however, does not fall, as firms switch to other banks. We establish these results using supervisory data on corporate loans and variation in surcharges in the United States. These results contribute to the debate on the costs and benefits of surcharges and regulatory tailoring and their effects on the reallocation of credit supply across financial institutions.

Uncertainty, Access to Debt, and Firm Precautionary Behavior (with J. Gao and M. Giannetti)

Journal of Financial Economics (forthcoming)

Better access to debt markets mitigates the effects of uncertainty on corporate policies. We establish this result using the staggered introduction of anti-recharacterization laws in U.S. states. These laws enhanced firms’ ability to borrow by strengthening creditors’ rights to repossess collateral pledged in SPVs. After the passage of the laws, firms that face more uncertainty hoard less cash and increase payouts, leverage, and investment in intangible assets. Our findings suggest that better access to debt markets shields firms from fluctuations in uncertainty and decreases firms’ precautionary behavior.

Monetary Policy Uncertainty and Monetary Policy Surprises (with M. De Pooter, M. Modugno, J. Wu)

Journal of International Money and Finance (forthcoming)

Monetary policy uncertainty affects the transmission of monetary policy shocks to longer-term nominal and real yields. For a given monetary policy shock, the reaction of yields is more pronounced when the level of monetary policy uncertainty is low. Primary dealers and other investors adjust their interest rate positions more when monetary policy uncertainty is low than when uncertainty is high. These portfolio adjustments likely explain the larger pass-through of a monetary policy shock to bond yields when uncertainty is low. These findings shed new light on the role that monetary policy uncertainty plays in the transmission of monetary policy to financial markets.

Forced Asset Sales and the Concentration of Outstanding Debt: Evidence from the Mortgage Market (with M. Giannetti)

Journal of Finance, 2017, vol. 72, no. 3, pp. 1081–1118

We provide evidence that lenders differ in their ex post incentives to internalize price-default externalities associated with the liquidation of collateralized debt. Using the mortgage market as a laboratory, we conjecture that lenders with a large share of outstanding mortgages on their balance sheets internalize the negative spillovers associated with the liquidation of defaulting mortgages and are thus less inclined to foreclose. We find that zip codes with higher concentration of outstanding mortgages experience fewer foreclosures, more renegotiations of delinquent mortgages, and smaller house prices declines. These results are not driven by prior local economic conditions, mortgage securitization or unobservable lender characteristics.

Debt Enforcement, Investment, and Risk Taking Across Countries (with E. Morellec, E. Schroth and P. Valta)

Journal of Financial Economics, 2017, vol. 123, no. 1, pp. 22-41

We argue that the prospect of an imperfect enforcement of debt contracts in default reduces shareholder-debtholder conflicts and induces leveraged firms to invest more and take on less risk as they approach financial distress. To test these predictions, we use a large panel of firms in 41 countries with heterogeneous debt enforcement characteristics. Consistent with our model, we find that the relation between debt enforcement and firms' investment and risk depends on the firm-specific probability of default. A difference-in-differences analysis of firms' investment and risk taking in response to bankruptcy reforms that make debt more renegotiable confirms the cross-country evidence.

American Economic Review, 2015, 105(3): 958-992. 

An exogenous expansion in mortgage credit has significant effects on house prices. This finding is established using US branching deregulations between 1994 and 2005 as instruments for credit. Credit increases for deregulated banks, but not in placebo samples. Such differential responses rule out demand-based explanations, and identify an exogenous credit supply shock. Because of geographic diversification, treated banks expand credit: Housing demand increases, house prices rise, but to a lesser extent in areas with elastic housing supply, where the housing stock increases instead. In an instrumental variable sense, house prices are well explained by the credit expansion induced by deregulation.

House Price Dynamics with Dispersed Information (with M. Song)

Journal of Economic Theory 2014, 149(1): 350-382. 

We use a user-cost model to study how dispersed information among housing market participants affects the equilibrium house price. In the model, agents are disparately informed about local economic conditions, consume housing services, and speculate on price changes. Information dispersion leads agents to have heterogeneous expectations about housing demand and prices. Optimists, who expect high house price growth, buy in anticipation of capital gains; pessimists, who expect capital losses, prefer to rent. Because of short-selling constraints on housing, pessimistic expectations are not incorporated in the price of owned houses and the equilibrium price is higher and more volatile relative to the benchmark case of common information. We present evidence supporting the model's predictions in a panel of US cities.

Strategic Default and Equity Risk Across Countries (with E. Schroth and P. Valta

Journal of Finance, 2012, 67(6): 2051-2095.

LECG Prize for Best Conference Paper, EFA Bergen, August 2009

We show that the prospect of a debt renegotiation favorable to shareholders reduces the fi…rm’s' equity risk. The equity beta and return volatility are lower in countries where the bankruptcy code favors debt renegotiations and for …firms with more shareholder bargaining power relative to debt holders. These relations weaken as the country’'s insolvency procedure favors liquidations over renegotiations. In the limit, when debt contracts cannot be renegotiated, the equity risk is independent of shareholders' ’incentives to default strategically. We argue that these findings support the hypothesis that the threat of strategic default can reduce the …firm’s' equity risk.

Agency Problems and Endogenous Investment Fluctuations 

Review of Financial Studies, 2012, 25(7): 2301-2342.

This paper proposes a theory of investment fluctuations where the source of the oscillating dynamics is an agency problem between financiers and entrepreneurs. A central tenet of the theory is that investment decisions depend upon entrepreneurs’ initiative to select investment projects ex-ante, and financiers’ incentive to control entrepreneurs ex-post. Too much control discourages entrepreneurial incentive to initiate new investment, while too little control jeopardizes its productivity. This trade-off generates investment dynamics that mimic those of a standard credit frictions model, in which more entrepreneurial net worth leads to higher investment. The same trade-off is capable of generating endogenous reversal of investment booms, induced by an ongoing deterioration of project profitability. Investment fluctuations take place even though no external shocks hit the economy, and even though agents are perfectly rational.

Reconsidering the Role of Money for Output, Prices and Interest Rates (with P. Giordani) 

Journal of Monetary Economics, 2009, 56(3): 419-430

New Keynesian models of monetary policy predict no role for monetary aggregates, in the sense that the level of output, prices, and interest rates can be determined without knowledge of the quantity of money. This paper evaluates the empirical validity of this prediction by studying the effects of shocks to monetary aggregates using a VAR. Shocks to monetary aggregates are identified by the restrictions suggested by New Keynesian monetary models. Contrary to the theoretical predictions, shocks to broad monetary aggregates have substantial and persistent effects on output and prices.

Other Publications

Externalities and Macro-prudential policy (with G. De Nicolo and L. Ratnovski) also on VOX
Journal of Financial Perspective March 2014 | Volume 2 – Issue 1

As for any form of government intervention, macro-prudential policy should be justified by market failures. This paper discusses three key externalities across financial institutions and from financial institutions to the real economy that rationalize the need for macro-prudential policy: externalities related to strategic complementarities, fire sales and interconnectedness. We link each externality to recently proposed macro-prudential policy tools, and argue that, although various tools can correct the same externality, these tools are best seen as complements rather than substitutes.

Working Papers and Work in Progress

If banks make lending decisions with a focus on short-term earnings and stock price performance, it amplifies boom-bust credit cycles, leading in turn to real cycles for the aggregate economy. We document that during the U.S. housing credit boom, publicly-traded banks increased mortgage lending activity and relaxed standards much more than privately-held banks, and more so if they were run by short-term oriented CEOs. In the ensuing bust, counties with greater exposure to short term oriented public banks experienced more severe downturns across a variety of outcomes, including economically large drops in aggregate employment, durable consumption, and retail sales.

Housing and Non-Housing Consumption Complementarities (with James Graham and Li Geng)

Monetary Policy, Bank Risk-Taking and Aggregate Productivity (with Diana Bonfim, Daniel Diaz, and Ander Perez-Orive)

Monetary Policy and Income Inequality in the US
(with Francesca Loria and Egon Zakrajsek)

Zombie Firms in the US (with Camelia Minoiu and Ander Perez-Orive)

Old Working Papers

An Empirical Reassessment of the Relationship between Finance and Growth

This paper re-examines the empirical relationship between financial development and economic growth. It presents evidence based on an a variety of econometric methods and two standard measures of financial development: the level of liquid liabilities of the banking system and the amount of credit issued to the private sector by banks and other financial institutions. There are two main findings. First, cross section and panel data instrumental variables regressions reveal that financial development and economic growth are correlated but financial development does not cause economic growth. Second, using a procedure appropriately designed to estimate long-run relationships in a panel with heterogeneous slope coefficients, there is evidence that the finance-growth relationship is quite heterogeneous across countries and no clear indication that finance spurs economic growth.