Research
Publications
Journal of Monetary Economics, Vol. 128, pp. 35-50
Banks usually hold large amounts of domestic public debt which makes them vulnerable to their own sovereign's default risk. At the same time, governments often resort to costly public bailouts when their domestic banking sector is in trouble. We investigate how the interbank network structure and the distribution of sovereign debt holdings jointly affect the optimal bailout policy in the presence of this "doom loop". Rescuing banks with high domestic sovereign exposure is optimal if these banks are sufficiently central in the network, even though that requires larger bailout expenditures than rescuing low-exposure banks. Our findings imply that highly central banks can use exposure to their own government as a strategic tool to increase the likelihood of being bailed out. Our model thus illustrates how the "doom loop" exacerbates the "too interconnected to fail" problem in banking.
Presented at: NSE 2019 (Indiana University), SIAM 2019 (Toronto), 9th Workshop on Banks and Financial Markets (Vienna), EEA 2020, 7th International Conference on Sovereign Bond Markets 2020, ASSA 2021, SED 2021, 20th FDIC/JFSR Bank Research Conference, University of Bonn, Aix-Marseille School of Economics, Banco de España, VU Amsterdam, IWH Halle
Working Papers
Borrowing Beyond Bounds: How Banks Pass On Regulatory Compliance Costs (with M. Papoutsi) [Presentation@ECB]
Draft available upon request
Banks in the euro area must inform supervisors about each exposure that exceed 10% of the bank’s capital. Using a granular dataset that combines banks’ loan and security portfolios, we test whether banks pass on the cost of complying with the large-exposure framework to borrowers above the threshold. We show that after a decrease in the reporting threshold, small banks react by shifting more exposures just below the threshold. In addition, banks charge a sizable 74 basis point interest rate premium for large exposures, relative to firms just below the threshold. This premium is more pronounced for small banks and unrated borrowers with fewer banking relationships and hence fewer outside options. In response, when firms approach their bank’s large exposure threshold, they become more likely to borrow from other banks. Despite the “large-exposure penalty”, we find no statistical evidence for bunching below the threshold, suggesting that there are substantial frictions that prevent firms from switching to better-capitalized banks to reduce interest expenses.
Presented at: VU Amsterdam, Columbia Macro Lunch, 11th Workshop on Banks and Financial Markets (IWH Halle), IBEFA Summer Meeting 2023, Brussels EFI Network Workshop 2023, 5th Conference on Contemporary Issues in Banking (St. Andrews), GEA Christmas Meeting 2023 (Mannheim), ASSA 2024, ECB Annual Banking Supervision Research Conference 2024, 12th European Banking Center Conference – 2nd Tilburg Finance Summit, EFiC 2024 Conference in Banking and Corporate Finance, EFA 2024, German Finance Association (DGF) Annual Meeting 2024
Investors place value on financial assets not only for their cash flows but also for the additional services they offer, such as acting as a reliable store of value, serving as collateral, and meeting capital and liquidity requirements. These services have traditionally been valued as "convenience yields", a reduced-form measure that is silent about the potentially multifaceted nature of these service flows. By analyzing detailed price and holdings data of the euro area corporate bond market, this paper reveals the persistent variations in convenience yields across different sector portfolios, with banks, insurance companies, and pension funds leading, and the lowest yields noted in foreign-held portfolios. Notably, post-ECB corporate quantitative easing, the ECB's portfolio emerged with the highest convenience yield. Our findings suggest that factors such as collateral value, regulatory capital requirements, and liquidity needs are primary drivers of convenience yields in Euro area corporate bonds. Furthermore, it highlights the importance of service flows for the transmission of monetary policy.
Presented at: ASSA 2021, USC Marshall Junior Finance Conference on Valuations, Chicago Booth Asset Pricing Conference, MIT Sloan Junior Finance Faculty Conference, Safety vs. Liquidity Workshop, ECB, Princeton, Porto University, Federal Reserve, Bocconi-BAFFI-CEPR Asset Pricing Conference, Princeton Macro Finance Conference 2024
Work in Progress
What Constrains Bank Lending? A Cross-Sectional Analysis of the Marginal Propensity to Lend
Prepared under the 2023 Lamfalussy Fellowship Programme sponsored by the ECB