Publications

The Impact of Regulatory Stress Test on Bank Lending and Its Macroeconomic Consequences, with Falk Bräuning (April 2024), forthcoming at the Journal of Money, Credit and Banking.

Portfolio similarity among the largest US banks has increased since stress testing began in 2009, consistent with a model of optimal portfolio allocation. using detailed loan-level data, we find that banks rebalance their portfolio toward similarly diversified portfolios, leading to higher concentration in the aggregate banking system and raising financial stability concerns. Rebalancing is driven by a contraction in loans that cause losses under stress testing, especially by banks with high losses in past stress tests, triggering an overall contraction in credit. Firms relying on banks that perform poorly in stress testing cannot substitute the lost funding and reduce investment.       

Global Banking and the International Transmission of Shocks: A Quantitative Analysis, Journal of International Economics, vol. 145, November 2023, with Stefania Garetto and Arthur V. Smith.

This paper starts by establishing a set of stylized facts about global banks with operations in the United States. First, we show evidence of selection into foreign markets: the parent banks of global conglomerates tend to be larger than national banks. Second, selection by size is related to the mode of foreign operations: foreign subsidiaries of global banks and their parents are systematically larger than foreign branches and their parents, in terms of deposits, loans, and overall assets. Third, the mode of foreign operations affects the response of global banks to shocks and how those shocks are transmitted across countries. To explain these facts, we develop a structural model global banking whose assumptions mimic the institutional details of the regulatory framework in the US. The model sheds light on the relationship between market access, regulation, and capital flows, and can be used as a laboratory to perform counterfactual analysis on the effects of alternative regulatory policies.

Quarterly Selected study at the International Banking Library Newsletter, August 2016

Did High Leverage Render Small Businesses Vulnerable to the COVID-19 Shock, 2023, Journal of Money, Credit and Banking, 56 (5), with Falk Bräuning and J. Christina Wang.

Using supervisory data on small and mid-sized nonfinancial enterprises (SMEs), we find that those SMEs with higher leverage faced tighter constraints in accessing bank credit after the COVID-19 outbreak in spring 2020.  Specifically, SMEs with a higher pre-COVID leverage obtained a smaller volume of new loans and had to pay a higher spread on them during the pandemic period. Consistent with an inward shift in loan supply, these effects were concentrated in loans originated by banks with below-median capital buffers. Highly levered SMEs that relied on low-capital large banks for funding before the pandemic were not able to substitute to other sources of debt financing and thus experienced more of a reduction in total debt as well as a decline in investment and employment. On the other hand, the unprecedented public support, especially the Paycheck Protection Program (PPP), mitigated the adverse real effect stemming from bank credit constraint.

The Main Street Lending Program, 2022, Economic Policy Review, 28 (1), with David Arseneau, Molly Mahar, Donald P. Morgan, and Skander Van den Heuvel.

The Main Street Lending Program was created to support credit to small and medium-sized businesses and nonprofit organizations that were harmed by the pandemic, particularly those that were unsupported by other pandemic-response programs. It was the most direct involvement in the business loan market by the Federal Reserve since the 1930s and 1940s. Main Street operated by buying 95 percent participations in standardized loans from lenders (mostly banks) and sharing the credit risk with them. It would end up supporting loans to more than 2,400 borrowers and co-borrowers across the United States, with an average loan size of $9.5 million and total volume of $17.5 billion. This article describes the facility’s goals, its design, the challenges and constraints that shaped its reach, and the characteristics of its borrowers and lenders. The authors conclude with some lessons learned for future policymakers and facility designers. 

Risk, Returns, and Multinational Production, 2015, The Quarterly Journal of Economics, 130 (4), 2027-2073, with Stefania Garetto.

This paper starts by unveiling a new empirical regularity: multinational corporations systematically exhibit higher stock market returns and earnings yields than non-multinational firms. Within non-multinationals, exporters tend to exhibit higher earnings yields and returns than firms selling only in their domestic market. To explain this pattern, we develop a real option value model where firms are heterogeneous in productivity, and have to decide whether and how to sell in a foreign market where demand is risky. Firms selling abroad are exposed to risk: following a negative shock, they are reluctant to exit the foreign market because they would forgo the sunk cost that they paid to start investing abroad. Multinational firms are the most exposed due to the higher sunk costs they have to pay to enter. The model, calibrated to match aggregate U.S. export and foreign direct investment data, is able to replicate the observed cross-sectional differences in earnings yields and returns.

Diversification, Cost Structure, and the Risk Premium of Multinational Corporations, 2015, Journal of International Economics, 96 (1), 37–54, with Stefania Garetto and Lindsay Oldensky.

We investigate theoretically and empirically the relationship between the geographic structure of a multinational corporation and its risk premium. Our structural model suggests two channels. On the one hand, multinational activity offers diversification benefits: risk premia should be higher for firms operating in countries where shocks co-vary more with the domestic ones. Second, hysteresis and potential losses induced by fixed and sunk costs of production imply that risk premia should be higher for firms operating in countries where is costlier to enter. Our empirical analysis confirms these predictions and delivers a decomposition of firm-level risk premia into individual countries' contributions.

Optimal Portfolio Choice with Predictability in House Prices and Transaction Costs, 2014, The Review of Financial Studies, 27 (3): 823-880, with Carles Vergara and Stefano Corradin.

We develop and solve a model of optimal portfolio choice with transaction costs and predictability in house prices. We model house prices using a process with a time-varying expected growth rate. Housing adjustments are infrequent and characterized by both the wealth-to-housing ratio and the expected growth in house prices. We find that the housing portfolio share immediately after moving to a more valuable house is higher during periods of high expected growth in house prices. We also find that the share of wealth invested in risky assets is lower during periods of high expected growth in house prices. Finally, the decrease in risky portfolio holdings for households moving to a more valuable house is greater in high-growth periods. These findings are robust to tests using household-level data from the Panel Study of Income Dynamics (PSID) and Survey of Income and Program Participation (SIPP) surveys. The coefficients obtained using model-simulated data are consistent with those obtained in the empirical tests.