Florian Heider's homepage

I am an Adviser in the Financial Research Division at the European Central Bank (my CV), a Research Fellow in the Financial Economics Programme of the CEPR, and an associate editor of the Journal of Financial Intermediation.
This is my private site and the views expressed in the material on these pages are my own and do not reflect those of the European Central Bank (my official webpage).
Contact: florian *dot* heider *at* gmail *dot* com [PGP key]

Research interests:

  • Corporate Finance
  • Banking, Interbank Markets
  • Market infrastructures

Published research in refereed journals:

(links are to final or near-final versions on SSRN, for published versions see journal sites)

Banks are reluctant to pass on negative rates to depositors, which increases the funding cost of high-deposit banks, and reduces their net worth, relative to low-deposit banks. As a consequence, the introduction of negative policy rates by the European Central Bank in mid-2014 leads to more risk taking and less lending by euro-area banks with greater reliance on deposit funding. [RFS Editor's Choice, Featured in New York Times (11 Sept. 2019)]
Examines the impact of ECB liquidity provision on the trading of liquidity among banks since the Lehman Bankruptcy. More central bank liquidity reduces the demand for liquidity in the market but also increases the supply in stressed countries, especially during the height of the sovereign debt crisis. [JFI Best Paper Award (2016)]
Analyzes optimal hedging contracts between a protection buyer and protection sellers. Such contracts may turn into liabilities and undermine incentives of protection sellers not to take risks. Margins help to restore incentives. [Best Paper Award by Europlace Institute of Finance (2016), Featured in Financial Times Alphaville (11 Jan. 2012)]
    Uses staggered corporate income tax rates across U.S. states to show that tax considerations are a first-order determinant of firms’ capital structure choices. Consistent with dynamic trade-off theory, the tax sensitivity of leverage is asymmetric (firms do not reduce leverage in response to tax cuts) and leverage exhibits hysteresis.
    Asymmetric information about banks' illiquid assets leads to a malfunctioning of unsecured interbank markets where banks smooth idiosyncratic liquidity shocks. [Bocconi University conference on "Business Models in Banking" Best Paper Award (2010), Marjolin prize of SUERF (2010)]
    • Loan prospecting, with Roman Inderst, Review of Financial Studies, 25, 2381-2415 (2012).
    Loan officers need to prospect for loans and transmit the soft information they obtain in the process. Competition worsens the bank's internal agency problem, reduces loan officers to salespeople with steep, volume-based incentives and lowers lending standards.
    Central clearing platforms offer mutualization of counterparty risk. But this insurance undermines institutions' incentives to search for robust counterparties, which is necessary to insure against aggregate risk. There exists a trade-off between mutualization of risk and the system's ability to withstand aggregate risk.
    Firms that are uncertain about the risk of their operations issue equity to close their financing deficit. The evidence points to an adverse selection cost of debt. [CICF Xia Yihong Best Paper Prize (2010)]

    Uses a corporate-finance empirical approach to examine the cross-sectional and time-series variation in the capital structure of large, publicly traded US and European banks. The findings are inconsistent with a first-order effect of capital regulation.

    Introduces an agency cost of "winner-picking" in multi-divisional firms that can lead to a conglomerate discount even though the reallocation of resources is ex-post efficient. 
    Explains the decoupling of secured and unsecured rates in the interbank market during the 2007-09 financial crisis and emphasizes the importance of the availability of collateral.

    Current working papers:

    We examine the constrained-efficiency of optimal variation margins when agents have to liquidate assets to obtain cash to satisfy variation-margin calls. The associated fire sale generates a pecuniary externality but the market equilibrium is constrained efficient even though markets are endogenously incomplete (i.e., agents' marginal rates of substitution are not equalized).
    Market making, i.e., buying when the price is low, hurts providing incentives. It provides liquidity and allows information trading but to incentive managers not to shirk, there should be (further) selling. To provide incentives, the optimal contract places more weight on the stock price when the market is more liquid. Additional performance measure based on public information are valuable, but not because of noise trading. And economic efficiency can be independent of market efficiency because the optimal incentive contract adjusts to market conditions.
    Examines stress in the European interbank market using data derived from payments transactions. A triple-difference approach around the peak of the sovereign debt crisis shows that the increased counterparty risk of borrower banks in the periphery of the eurozone leads to less lending from banks in the core. Yet, the loss of cross-border lending is covered by an increase in domestic lending.
    Banks need to hold liquidity (reserves) for prudential reasons. Holding liquid assets gives banks the right incentives to invest in risk management. Once banks operate under deposit insurance (which we derive from first principles) or trade on the interbank market (to insure against idiosyncratic liquidity risk), holding liquid assets must be regulated. Our theory of liquidity requirements avoids "Goodhart's paradox" and bears little resemblance to current Basel-type liquidity regulation.

    Other publications: