Research

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Abstract. The bank lending channel is heterogeneous across firms. Using matched bank-firm credit data, we develop a framework that estimates the effects of firm-demand and bank-supply credit shocks, allowing for interactions between bank and firm unobserved factors. Bank shocks can have heterogeneous effects across firm types, where firm type is unobserved for the econometrician. We decompose credit growth dynamics into time-varying firm and bank-firm type interaction effects. We uncover significant heterogeneity in the bank lending channel: i) The effect of bank shocks varies considerably across the identified firm types, ii) During the Great Recession, more exposed banks severely contracted their loan supply to some firms but shielded others, iii) We uncover a bankfirm matching channel: the transmission of shocks crucially depends on the bank-firm network, with credit growth dropping by up to 20% in a counterfactual randomly matched network, iii) Accounting for interactions helps to more precisely estimate the impact of bank shocks on firm real outcomes.

[ESRB Working Paper No. 68]

Abstract. I propose and estimate a model in which bank and firm net worth influence macroeconomic fluctuations. Firm net worth affects borrowing capacity. Bank net worth is necessary for intermediation: banks lend to firms and expand the flow of funds using their diversified portfolio as collateral subject to aggregate risk. Aggregate firm and bank net worth determine activity. The net worth distribution is only relevant in banking crises, in those, shocks to bank net worth have an effect beyond standard financial frictions models. A novel bank accelerator helps explain output, bank net worth, lending, and spreads during the 1990, 2001, and 2008 recessions.

We develop a novel framework that features loss amplification through firm-ban linkages. We use it to study optimal intervention in a lockdown that creates cash shortfalls to firms, which must borrow from banks to avoid liquidation. Firms’ increase in debt reduces firms’ output due to moral hazard. Banks need safe collateral to raise funds. Without intervention, aggregate risk constrains bank lending, increasing its cost and amplifying output losses. Optimal government support must provide sufficient aggregate risk insurance, and can be implemented with transfers to firms and fairly-priced guarantees on banks’ debt. Non-priced bank debt guarantees and loan guarantees are suboptimal policies.

Abstract. We build a competitive equilibrium model of safe asset creation through securitization. Securitization vehicles create safe assets by pooling idiosyncratic risks from loan originators. Equity investors allocate their wealth between originators, who need skin-in-the-game, and vehicles, who need loss-absorption capacity against aggregate risk. When debt investors accept risk, all equity is invested in originators, while when they demand safe assets, some equity is reallocated toward vehicles. Safe asset creation may, paradoxically, increase the risk of originated loans and reduce expected output. Our model is consistent with a broad set of facts in the run-up to the global financial crisis.

[Previous versions of this paper circulated with titles "Equity allocation and risk-taking in the intermediation chain" and "Demand for safety, risky loans: A model of securitization"]

Runner-up of the Ieke van den Burg Prize for Research on Systemic Risk (2016), European Central Bank, [ESRB Working Paper No. 24]

Abstract. We study the optimality of macroprudential policies in an environment where banks allocate liquid assets across firms. Informational frictions between banks can cause interbank market freezes, prompting firms to inefficiently accumulate their own liquid assets. Liquidity hoarding by firms reduces the demand for bank loans and bank profits, makes banking freezes even more likely, and may ultimately trigger a suboptimal self-fulfilling equilibrium. Such “liquidity panics” provide a new rationale for liquidity requirements on banks, which alleviate frictions in the banking sector and paradoxically can increase aggregate investment. Instead, policies encouraging bank lending can have the opposite effect.

We analyze government interventions to support firms facing liquidity needs during a lockdown in a competitive model of financial intermediation. Banks and firms have legacy balance sheets at the lockdown date. Firms’ liquidity needs can be financed by banks that are subject to risk-weighted capital requirements and funded with insured deposits. An increase in firms’ overall claims to external investors aggravates moral hazard problems and reduces expected output. The government can support firms directly through transfers or indirectly through guarantees to new bank loans or reductions in the capital requirement. As a result of the diversification of idiosyncratic firm risks conducted by banks, a reduction in the capital requirement only creates costs for the government following negative aggregate shocks that lead to banks’ failure. A pecking order on the government policies that maximize output as a function of the government’s budget is derived. For low budget, a reduction in capital requirements is optimal and is fully transmitted to firms through increases in banks’ leverage. For medium budget, the capital requirement reduction becomes slack and needs be combined with transfers to firms or loan guarantees. For high budget, transfers are strictly necessary.

Coming soon.