Florian Heider's homepage

I am a Principal Economist in the Financial Research Division at the European Central Bank (my CV) and a Research Fellow in the Financial Economics Programme of the CEPR.
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)

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 (2017), Featured in Financial Times Alphaville (11.1.2012)]
    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 model the interaction between optimal margins and fire-sale prices (when assets are sold to satisfy margin calls). The supply of assets can be downward-sloping, which creates multiple welfare-ranked equilibria. The pecuniary externality present when selling assets means that margins are used too much relative to the constrained-efficient outcome.
    We show that negative policy rates transmit to the real sector via bank lending in a novel way. Setting a negative policy rate constitutes a adverse shock to the net worth of banks with more deposit funding because banks are unable (or unwilling) to charge negative rates to depositors. Under a negative policy rate, high-deposit banks to lend less overall, and direct lending to riskier firms, some of which did not receive loans before (all relative to low-deposit banks in a diff-in-diff set up at the time the ECB introduces negative rates).
    In our model, a CEO receives more stock-based pay when there is more noise and less information in the market. Noise reduces adverse selection and increases liquidity in the market. More liquidity means the stock price reacts less to orders, which makes it more difficult to detect shirking behavior of the CEO. To reestablish the correct pay-for-performance sensitivity, the CEO must receive more stock-based pay. Our model can explain the prevalence of stock-based pay in hard-to-value firms despite market efficiency, efficient contracting and the absence of manipulation.
    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: