Research

Recent Working Papers

The Effects of an Aging Population on the Structure of Bank Assets and Liabilities (with Panagiotis Avramidis)

This paper presents empirical evidence on how population age affects a bank’s asset-liability structure. Consistent with a lifecycle model and localized deposit issuance and lending, it finds that banks operating in local areas with older populations rely less on wholesale sources of funding and issue more retail deposits that are paid relatively lower interest rates, particularly at longer maturities. Despite these banks’ deposit rates being lower and slower to adjust, their deposits are less likely to be withdrawn when market interest rates rise. Moreover, these banks’ assets are composed of more securities and fewer loans, particularly business and residential loans. They also choose securities and loans with relatively long maturities that significantly raise their asset-liability maturity gap. The paper’s findings are robust to the possibilities of economy-induced population age changes, non-local lending, and securitization.

Publications and Internet Appendices

Old Working Papers

Syndicated Loan Risk: The Effects of Covenants and Collateral (with Dennis Ding)

This paper presents a new approach that quantifies how a credit rating agency and fixed-income investors judge the effects of collateral and various covenants on syndicated loan risk. It addresses a firm’s self-selection of these contract terms by analyzing their effects on: 1) the difference between the loan’s credit rating and the senior, unsecured credit rating of the borrowing firm; and 2) the difference between the borrowing firm’s senior, unsecured CDS spread and its loan’s credit spread. The results show that the rating agency and investors agree that a collateral requirement and a capital expenditure covenant are most important for reducing a loan’s credit risk. However, equity issuance and excess cashflow sweeps increase a loan’s risk.

Who Bears the Burden of Banks’ Corporate Taxes? (with Leming Lin)

Our model of spatial competition predicts that the incidence of a bank’s corporate income tax falls on retail depositors when the bank operates in a market where there is excess retail savings relative to retail lending opportunities. In contrast, the incidence falls on retail borrowers in a market where retail lending exceeds retail savings. Moreover, bank employees bear a burden from higher taxes in proportion to the decline in total lending and deposits. Using branch-level retail interest rate data of U.S. banks over the period 1997 to 2013, we find empirical support for this theory. An increase in a state’s corporate income tax leads to a decline in rates paid on retail deposits when the state’s banks operate in counties where retail savings is likely to be relatively high. Yet in the state’s counties where retail lending tends to exceed retail savings, retail loan rates rise when corporate income taxes are raised. Some evidence that corporate taxes affect bank employment and wages is also found.

Do Agent Banks Use CDS to Hedge Their Syndicated Loan Exposures? (with Deming Wu)

This paper examines a potential conflict between a corporate loan syndicate’s participating lenders and the bank that acts as the “agent” or “lead arranger” for the syndication. Due to its ability to trade anonymously in credit default swaps (CDS) written on corporate borrowers, an agent bank can reduce its “skin in the game” and, in turn, its incentive to efficiently perform its delegated tasks of credit screening and monitoring the borrower. Using proprietary data on individual banks’ CDS trading and loan exposures over the 2015 to 2018 sample period, we find evidence that agent banks use CDS to hedge their loan exposures more than do participant banks. However, agent bank hedging occurs only for revolving lines of credit and not term loans, and mainly for loans to investment-grade borrowers where CDS appears to be a better hedge.

Measuring Bail-in Credibility (with Maximilian Guennewig)

We estimate investor perceptions of a bank bailout for the United States (US) and the United Kingdom (UK) based on a structural model similar to Merton (1974, 1977). A bank’s liabilities are contingent claims on its assets so that bank equity and debt can be valued as options on the bank’s asset value. However, we also allow for the possibility that investors in the bank’s debt might avoid losses if a government bails them out at the time of failure. As a result, credit spreads on a bank’s subordinated and senior debt can be valued as the product of the probability that the debt is not bailed out and the expected loss rates on these debts in the absence of a bailout.

Page updated

Google Sites

Report abuse