The International Bank Lending Channel of Monetary Policy Rates and Quantitative Easing: Credit Supply, Reach-for-Yield, and Real Effects (with Jose Luis Peydro, Jessica Roldan and Claudia Ruiz) - Journal of Finance 74 (1), 55-90, January 2019.

This paper identifies the international credit channel of monetary policy by analyzing the universe of corporate loans in Mexico, matched with firm and bank balance-sheet data, and by exploiting foreign monetary policy shocks, given the large presence of European and U.S. banks in Mexico. The paper finds that a softening of foreign monetary policy increases the supply of credit of foreign banks to Mexican firms. Each regional policy shock affects supply via their respective banks (for example, U.K. monetary policy affects credit supply in Mexico via U.K. banks), in turn implying strong real effects, with substantially larger elasticities from monetary rates than quantitative easing. Moreover, low foreign monetary policy rates and expansive quantitative easing increase disproportionally more the supply of credit to borrowers with higher ex ante loan rates -- reach-for-yield -- and with substantially higher ex post loan defaults, thus suggesting an international risk-taking channel of monetary policy. All in all, the results suggest that foreign quantitative easing increases risk-taking in emerging markets more than it improves the real outcomes of firms.

Working Papers

Did the Community Reinvestment Act (CRA) Lead to Risky Lending? (with Sumit Agarwal, Effi Benmelech, Nittai Bergman, Sergio Correia and Amit Seru) - R&R Journal of Political Economy

We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on mortgage lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the three quarters preceding the CRA exams, lending in CRA-eligible census tracts increases by about 0.8 percent every quarter and delinquency rates by about 7.5 percent. These patterns are accentuated among large banks and in banks with previous non-satisfactory CRA evaluations.

Forward-Looking Provisions and the Economic Cycle: Credit Supply and Real Effects (with Jose Luis Peydro, Gaizka Ormazabal, Monica Roa and Miguel Sarmiento) - R&R Journal of Accounting Research

Using Colombian credit registry data on commercial bank lending we analyze the impact of a change in loan provisioning on banks’ credit supply and on the real outcomes of borrowers. In mid-2007, Colombian banks were mandated to accumulate loan provisions based on expected losses rather than on incurred losses. More concretely, under the new rule banks had to set aside higher provisions at the outset of a loan and these provisions depended negatively on borrower size and on collateral posted. We find that under the new rule, loan volume (interest rate) decreases (increases) substantially for smaller and younger borrowers, and especially in weaker banks. Furthermore, defaults increase as loan delinquency becomes a more absorbing state.

Financing the Government: Procurement Rules and Bank Lending in an Emerging Market (with Sumit Agarwal, Claudia Ruiz and Jian Zhang)

We show that when government entities have discretion to procure bank loans, they select lenders that ease financing to their suppliers. Using credit registry data from Mexico, we exploit exogenous shocks to credit demand of government entities along with the introduction of a regulation forcing government entities to select lenders based on cost. Prior to the reform, banks that finance government entities issue loans of larger size and lower interest rates to government suppliers, especially smaller ones. This result is not driven by banks’ informational advantage. After the procurement regulation, loan volumes to government entities remain unchanged but credit conditions to their suppliers tighten with important real effects.

Expansionary Fiscal Austerity: Reallocating Credit Amid Fiscal Consolidation (with Javier Perez-Estrada, Jose Luis Peydro, and Claudia Ruiz Ortega)

We show that limits to local public debt induce expansionary fiscal austerity, raising extreme poverty. We use administrative datasets to exploit a Mexican law limiting local governments’ debt. After the Law, states with higher ex-ante public debt grow more, despite larger fiscal consolidation. Banks reallocate credit supply away from indebted local governments and into private, local firms, with positive strong firm-level real effects. The crowding-out reduction is stronger for banks more exposed to public debt, in states spending less on infrastructure, and for firms financially-constrained and less dependent on government spending. However, extreme poverty increases, especially in states with previously higher social public spending.

Risk, Financial Development and Firm Dynamics [SSRN]

I document that the average productivity of firms tends to increase, and its variance to decrease, as they age. These two facts combined suggest that managers learn to reduce their mistakes as they operate. I develop a quantitative framework mimicking these dynamics and find that young firms have substantially higher financing costs due to lower and riskier returns. In this scenario, a reduction in the financial development of an economy raises disproportionately the cost of credit of young-productive firms increasing the input misallocation within this subgroup. To test the validity of the theory, I find that the data confirms some novel predictions on a series of firm-level moments. Finally, I show that introducing these two facts allows our model to better explain the relation between financial and economic development.

Work in Progress

The Real and Credit Effects of Loan Guarantees: Loan-Level Evidence of a Collateral Reform (with Jose Luis Peydro, Jessica Roldan and Claudia Ruiz)

We analyze the impact of collateral on bank credit availability and on real outcomes. For identification, we exploit the creation of a centralized registry of mobile guarantees (e.g. vehicles, machinery) as well as cross-sector variation on the use of mobile assets and cross-firm variation on the length of credit history, age and size. We find that the introduction of the registry strongly increases the share of collateralized loans using mobile guarantees, especially among young and small borrowers, as well as borrowers with short credit history. Using firms operating in sectors with high (low) mobile asset intensity as treatment (control) group, we find that the registry increases the probability of opening a credit, while increasing loan volume, duration and use of collateral. All these effects are stronger for young firms and firms with short credit history. Finally, results suggest strong real effects of collateral, in particular increasing sales, assets and employment as well as labor-productivity.

Erasing Negative Information from Credit History: Impact on Bank Credit and on Real Outcomes (with Jose Luis Peydro, Jessica Roldan and Claudia Ruiz)

We explore the effect of information sharing on the commercial bank-lending market. More concretely, we examine the consequences of a reform mandating credit bureaus to erase any negative information on firms that had not defaulted in the previous 72 months, and whose outstanding debt was under than 100,000 dollars. In particular, we analyze the impact on the credit margins and on real outcomes, using loan-level information (both loan applications and extended loans) and borrowers’ balance-sheet. Using a difference-in-difference approach, comparing similar borrowers whose total debt was a touch above/below the threshold, we find a significant increase in lending and in real outcomes, such as employment and investment, to borrowers whose negative information was erased. This evidence suggests that restrictions to information sharing, as the one described in this paper, may in some scenarios lead to more efficient outcomes by reducing the stigmatization of past default.

Behavioral Regulators (with Sumit Agarwal, Amit Seru and Kelly Shue)