Research
Working Papers (Banking):
The Myth of the Lead Arranger's Share
(with Quirin Fleckenstein, Sebastian Hillenbrand, and Anthony Saunders)
Abstract: We make use of SNC data to examine syndicated loans in which the lead arranger retains no stake. We find that the lead arranger sells its entire loan share for 27 percent of term loans and 48 percent of Term B loans, typically shortly after syndication. In contrast to existing asymmetric information theories on the role of the lead share, we find that loans, which are sold, are less likely to become non-performing in the future. This result is robust to several different measures of loan performance and reflected in subsequent secondary market prices. We explore syndicated loan underwriting risk as an alternative theory that may help explain this result.
Status: Revision requested in Journal of Finance (JF)
Federal Reserve Bank of New York Staff Report available here
Note: Guide for computing DS shares can be found here.
Specialization in Banking
(with Cecilia Parlatore and Anthony Saunders)
Abstract: Using highly detailed data on the loan portfolios of large U.S. banks, we document that these banks "specialize" by concentrating their lending disproportionately into one industry. This specialization improves a bank’s industry-specific knowledge and allows it to offer generous loan terms to borrowers, especially to firms with access to alternate sources of funding and during periods of greater nonbank lending. Superior industry-specific knowledge is further reflected in better loan and, ultimately, bank performance. Banks concentrate more on their primary industry in times of instability and relatively lower Tier 1 capital. Finally, specialization counteracts a well-documented trend in reduced lending by large banks to opaque small and medium-sized enterprises.
Status: Revision requested in Journal of Finance (JF)
Federal Reserve Bank of New York Staff Report available here
The Costs of Corporate Debt Overhang
(with João A. C. Santos)
Abstract: Firms with debt overhang, measured as total borrowing to cash-flow, experience 2% slower asset growth during ordinary times and up to 3% slower growth during a crisis, compared to similar firms without debt overhang. These patterns extend to a firm's growth in employment and capital expenditures. The effects of debt overhang during the great recession are more pronounced for firms with greater need for external funding, including those that had to refinance during the crisis and those with fewer unused funds in their credit lines. We account for debt-structure endogeneity by showing that overhang correlated with credit line cuts after the failure of a syndicated member bank. The effects of the debt overhang during the great recession, together with early data on the revenue contractions following the COVID-19 outbreak, suggest that the increase in debt overhang could lead to an up to 10% decrease in growth for firms in industries most affected by the economic lock-down.
Status: Early stage working paper available here
Working Papers (Climate Finance):
Unintended Consequences of "Mandatory" Flood Insurance
(with João A. C. Santos)
Abstract: We document that the quasi-mandatory U.S. flood insurance program reduces mortgage lending along both the extensive and intensive margins. We measure flood insurance mandates using FEMA flood maps, focusing on the discreet updates to these maps that can be made exogenous to true underlying flood risk. Reductions in lending are most pronounced for low-income and low-FICO borrowers, implying that the effects are at least partially driven by the added financial burden of insurance. Our results are also stronger among non-local or more-distant banks, who have a diminished ability to monitor local borrower adherence to complicated insurance mandates. Overall, our findings speak to the unintended consequences of (well-intentioned) regulation. They also speak to the importance of factoring in affordability and enforcement feasibility when introducing mandatory standards.
Status: Working paper available here
How Bad Are Weather Disasters for Banks?
(with Sarah N. Hamerling, and Donald P. Morgan)
Abstract: Not very. We find that FEMA disasters over the last quarter century had insignificant or small effects on U.S. banks’ performance. This stability seems endogenous rather than a mere reflection of federal aid. Disasters increase loan demand, which offsets losses and actually boosts profits at larger banks. Local banks tend to avoid mortgage lending where floods are more common than official flood maps would predict, suggesting that local knowledge may also mitigate disaster impacts.
Status: Revision Requested in the Journal of Money, Credit, and Banking (JMCB), Working paper available here
Working Papers (Economic History):
Pandemics Change Cities: Municipal Spending and Voter Extremism in Germany, 1918-1933
Abstract: We merge several historical data sets from Germany to show that influenza mortality in 1918-1920 is correlated with societal changes, as measured by municipal spending and city-level extremist voting, in the subsequent decade. First, influenza deaths are associated with lower per capita spending, especially on services consumed by the young. Second, influenza deaths are correlated with the share of votes received by extremist parties in 1932 and 1933. Our election results are robust to controlling for city spending, demographics, war-related population changes, city-level wages, and regional unemployment, and to instrumenting influenza mortality. We conjecture that our findings may be the consequence of long-term societal changes brought about by a pandemic.
Status: Federal Reserve Bank of New York Staff Report available here
Publications and Forthcoming:
Who Can Tell Which Banks Will Fail?
(with Markus Brunnermeier and Stephan Luck)
Abstract: We use the German Crisis of 1931, a key event of the Great Depression, to study how depositors behave during a bank run in the absence of deposit insurance. We find that deposits decline by around 20 percent during the run and that there is an equal outflow of retail and nonfinancial wholesale deposits from both ex-post failing and surviving banks. This implies that regular depositors are unable to identify failing banks. In contrast, the interbank market precisely identifies which banks will fail: the interbank market collapses for failing banks entirely but continues to function for surviving banks, which can borrow from other banks in response to deposit outflows. Since regular depositors appear uninformed, it is unlikely that deposit insurance would exacerbate moral hazard. Instead, interbank depositors are best positioned for providing “discipline” via short-term funding.
Review of Financial Studies (RFS)
Note: Early stage working paper was circulated as: "Micro-evidence from a system-wide financial meltdown: The German Crisis of 1931", paper available here
Local Banks, Credit Supply, and House Prices
Abstract: I study the effects of an increase in the supply of local mortgage credit on house prices by exploiting a natural experiment from Switzerland. In 2008, retail customers migrate deposits from universal banks that are suffering overseas losses to homogeneous and narrowly-local mortgage banks. Using the distance between the two types of banks as an instrument for deposit growth, I show that local mortgage banks increase mortgage lending, which correlates with subsequent house price growth in their markets. My results highlight that bank specialization plays an important role in the allocation of capital.
Journal of Financial Economics (JFE)
Working Paper, available here
Borrowing Constraints, Home Ownership and Housing Choice: Evidence from Intra-Family Wealth Transfers
(with Martin Brown)
Abstract: We study the impact of borrowing constraints on home ownership and housing demand by comparing the tenure choice and housing quality of consumers who receive intra-family wealth transfers to those that do not. Our analysis is based on household-level panel data providing information on the receipt of wealth transfers, changes in tenure status as well as changes in the size and quality of housing. On average we find that the receipt of a wealth transfer increases the propensity of consumers to transition from renters to home-owners by 6-8 percentage points (35% of the sample mean). Additional analyses suggest that this effect is unlikely to be driven by wealth effects and thus can be attributed to the relaxation of borrowing constraints. By contrast, wealth transfers do not increase the likelihood that existing homeowners “trade-up” to larger homes in better locations.
Journal of Money, Credit, and Banking (JMCB).
Earlier versions of the Working Paper are available on SSRN
Financial Frictions, Real Estate Collateral, and Small Firm Activity in Europe
(with Ryan Banerjee)
Abstract: We investigate the importance of housing-based collateral for small and young - i.e. credit constrained - firms across six European economies. We find that borrowing, investment, and employment are all more strongly correlated with house price growth in these small and young firms, compared with slightly larger or older firms. This effect is on average stronger in the boom years, before the global financial crisis, and more pronounced in countries with more lengthy bankruptcy resolution procedures.
European Economic Review (EER)
Note: An earlier version of this paper was circulated as "Housing Collateral and Small Firm Activity in Europe "
Federal Reserve Bank of New York Staff Report available here
Understanding the Linkages between Climate Change and Inequality in the United States
(with Ruchi Avtar, Rajashri Chakrabarti, Janavi Janakiraman, and Maxim L. Pinkovskiy)
Abstract: We conduct a review of the existing academic literature to outline possible links between climate change and inequality in the United States. First, researchers have shown that the impact of both physical and transition risks may be uneven across location, income, race, and age. This is driven by a region’s geography as well as its adaptation capabilities. Second, measures that individuals and governments take to adapt to climate change and transition to lower emissions risk increasing inequality. Finally, while federal aid and insurance coverage can mitigate the direct impact of physical risks, their structure may— inadvertently—sustain and entrench existing inequalities. We conclude by outlining some directions for future research on the nexus between inequality and climate change.
Economic Policy Review (EPR)
Note: An earlier version of this paper was circulated as a Federal Reserve Bank of New York Staff Report available here