WORKING PAPERS
"QE, Bank Liquidity Risk Management, and Non-Bank Funding: Evidence from U.S. Administrative Data", Matt Darst, Sotiris Kokas, Alexandros Kontonikas, and Jose-Luis Peydro
We show that the effectiveness of unconventional monetary policy is limited by how banks adjust credit supply and manage liquidity risk in response to fragile non-bank funding. For identification, we use granular U.S. administrative data on deposit accounts and loan-level commitments, matched with bank-firm supervisory balance sheets. Quantitative easing increases bank fragility by triggering a large inflow of uninsured deposits from non-bank financial institutions. In response, banks that are more exposed to this fragility actively manage their liquidity risk by offering better rates to insured deposits, while cutting uninsured rates. Doing so, they shift away from uninsured to insured deposits. Importantly, on the asset side, these banks also reduce the supply of contingent credit lines to corporate clients. This tightening of liquidity provision has real effects, as firms reliant on more exposed banks experience a reduction in liquidity insurance stemming from credit lines, leading to lower investment. Our analysis reveals that the fragility of deposit funding can disrupt the complementarity between deposit-taking and the provision of credit lines.
"Macroprudential Regulation and Lending Standards", with Matt Darst and Ehraz Refayet
We examine how macroprudential capital requirements interact with competition between banks and non-banks to shape lending standards. Banks have private information and benefit from deposit insurance, while non-banks lack such advantages but are less regulated. We show that higher capital requirements raise banks’ incentives to screen, tightening lending standards despite a decline in lender protections at the contract level. Non-bank competition does not erode but rather strengthens aggregate standards by crowding out riskier bank lending. Optimal capital regulation is lower in the presence of non-banks. Our analysis helps rationalize dynamics in leveraged loan and private credit markets.
"Designing a Main Street Lending Facility"
Banks add value by monitoring borrowers. High funding costs make banks reluctant to lend. A central bank can ease funding by purchasing loans, but cannot distinguish which loans require more or less monitoring, exposing it to adverse selection. Multi-tier pricing arises as the optimal design setting differential purchases terms given loan characteristics. The relative welfare gain compared to uniform pricing depends on three sufficient statistics: the share of loans requiring monitoring, the risk-retention ratio, and the liquidity premium. For plausible values in the data, the gain ranges from 0.02% to 0.31% of the size of central bank's loan purchases.
WORK IN PROGRESS
"A Model of Leveraged Bubbles", with Nina Biljanovska, Jordi Gali, and Lucyna Gornicka
"On the Tradeoffs between Haircuts and Interest Rates in the Design of the Optimal Discount Window", with Anil Kashyap and Antonis Kotidis
"The Fragility of Perfectly Safe Digital Money", with Elizabeth Klee, Arazi Lubis, Chase Ross, Sharon Ross
