Working Papers:
Banking:
Do Lead Arrangers Retain their Lead Share?
(with Quirin Fleckenstein, Sebastian Hillenbrand, and Anthony Saunders)
Abstract: We examine how lead arrangers’ ownership stakes in syndicated loans evolve after origination, complementing prior research on lead shares at origination. Lead arrangers tend to retain shares in bank-held loans but frequently sell shares in loans distributed to institutional investors, typically within days of origination. The frequency of these loan sales has increased over time, aligning with the rise of the originate-to-distribute model. Importantly, we find no evidence that loan sales are associated with worse performance. Additional evidence suggests that exposure through other loans, temporary retention during syndication, and reputation concerns help mitigate information asymmetries in the syndicated loan market.
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.
Note2: This paper was previously circulated as "The Myth of the Lead Arranger's Share"
The Dynamics of Deposit Flightiness and its Impact on Financial Stability
(with Jian Li, Xu Lu, and Yiming Ma)
Abstract: We find that the flightiness of depositors displays pronounced fluctuations over time, reaching unprecedentedly high levels after the Covid-19 crisis. Elevated deposit flightiness coincides with low interest rate environments, expansions in central bank reserves and a disproportionate increase in corporate deposits. Our dynamic model rationalizes these trends based on heterogeneity in investors’ convenience value, where those in the banking system value the convenience benefits of deposits more. Following deposit inflows from outside investors, e.g., due to QE’s reserve expansions, the marginal depositor becomes more rate-sensitive and the risk of panic runs increases. Our findings imply that the risk of panic runs triggered by policy rate hikes is amplified when the Fed’s balance sheet size is larger, highlighting a novel linkage between conventional and unconventional monetary policy.
Status: Working paper available here
Climate Finance:
Unintended Consequences of "Mandatory" Flood Insurance
(with João 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 Hamerling and Donald 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
Do Mortgage Lenders Respond to Flood Risk?
(with Evan Perry and João Santos)
Abstract: Using unique nationwide property-level mortgage, flood risk, and flood map data, we analyze whether lenders respond to flood risk that is not captured in FEMA flood maps. We find that lenders are less willing to originate mortgages and charge higher rates for lower LTV loans that face “un-mapped” flood risk. This effect is weaker for high income applicants, as well as non-banks and small local banks. However, we find evidence that non-banks and local banks are more likely to securitize/sell mortgages to borrowers prone to flood risk. Taken together, our results are indicative that mortgage lenders are aware of flood risk outside FEMA’s identified flood zones.
Status: Working paper available here
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
Accepted, Forthcoming, or Published:
Banking:
Information-Based Pricing in Specialized Lending
(with Zhiguo He, Jing Huang, and Cecilia Parlatore)
Abstract: We study specialized lending in a credit market competition model with private information. Two banks, equipped with similar data processing systems, possess “general” signals regarding the borrower's quality. However, the specialized bank gains an additional advantage through further interactions with the borrower, allowing it to access “specialized” signals. In equilibrium, both lenders use general signals to screen loan applications, and the specialized lender prices the loan based on its specialized signal conditional on making a loan. This private-information-based pricing helps deliver the empirical regularity that loans made by specialized lenders have lower rates (ie, lower winning bids) and better ex-post performance (ie, lower non-performing loans). We show the robustness of our equilibrium characterization under a generalized information structure, endogenize the specialized lending through information acquisition, and discuss its various economic implications.
Outlet: Journal of Financial Economics (JFE)
Working paper available 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.
Outlet: 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.
Outlet: Journal of Financial Intermediation (JFI)
Working paper available here
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.
Outlet: 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
Awarded the 2025 Michael J. Brennan Award for the best paper in the RFS in 2024
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.
Outlet: 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.
Outlet: 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.
Outlet: 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
Announcement Effects of Contingent Convertible Securities: Evidence from the Global Banking Industry
(with Manuel Ammann and Christian Ehmann)
Abstract: This paper investigates the announcement effects of contingent convertible securities (CoCo bonds) issued by global banks between January 2009 and June 2014. Using a sample of 34 financial institutions and 87 CoCo bond issues, we examine abnormal stock price reactions and CDS spread changes before and after the announcement dates. We find that the announcement of CoCo bonds correlates with positive abnormal stock returns and negative CDS spread changes in the immediate post-announcement period. The effects are most pronounced for first-time issues. We explain the CDS spread changes by the lower probability of costly bankruptcy proceedings and the abnormal stock returns by a signaling framework that is based on pecking order theory and the cost advantage over equity (tax shield). We also examine the factors that are associated with the post-announcement abnormal stock returns and find that the existence of issuer call provisions reduces the positive abnormal returns.
Outlet: European Financial Management (EFM)
Note: An older version is available on SSRN
Climate Finance:
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.
Outlet: 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