The Impact of Banks’ Interest Rate Risk on Monetary Policy Transmission, with Tarik Alperen Er and Ibrahim Yarba.

Banks’ maturity mismatch exposes them to interest rate movements. Combining detailed supervisory data on Turkish banks’ interest rate risk exposure and comprehensive credit register data on the universe of loans, we show that banks with higher exposure to interest rate risk cut their lending and shorten their loan maturities once interest rates begin to rise. This effect is particularly pronounced for banks with low capital ratios, highlighting the importance of bank capital in contractionary periods. We find real effects at the firm level: Firms’ total loans decline, and as a result, they decrease their sales and employment. State-owned banks play a stabilizing role, stepping in to provide additional financing to their borrowers. As a result, firms that have a lending relationship with state-owned banks avoid a reduction in their loans and keep their sales and employment unaffected.

How do Mutual Funds Respond to Salient Pollution Events?, with Daniel Chai, Jin Zhang, and Han Zhou.

We investigate how salient chemical spills shape fund managers’ portfolio allocations. Analyzing 36 chemical spill incidents from 2000 to 2019, we find that funds based in the same designated market area as the spills exhibit higher ESG scores in the year following the events. These funds achieve their ESG commitments by divesting from low-to high-ESG stocks. This portfolio reallocation is more pronounced for funds with more socially responsible investors and among funds located in Democrat-leaning counties and regions with stronger environmental attitudes. This suggests that social motives, rather than financial considerations, are more likely to drive this portfolio reallocation. Additionally, we observe that fund managers strategically invest in high-ESG stocks that demonstrate strong financial performance and are geographically proximate, reflecting their efforts to align social investments with financial goals. 

How do Banks Propagate Economic Shocks?, with Yusuf Emre Akgündüz, Seyit Mümin Cilasun, Yavuz Selim Hacihasanoglu, and Ibrahim Yarba, revise and resubmit at European Economic Review.

Runner-up best paper prize at the EFiC 2022 Conference in Banking and Corporate Finance

Short summary of the results: SUERF policy brief

This paper exploits the COVID-19 pandemic as a negative shock to firm revenues and studies the transmission of this shock across industries via banks. We use the ex-ante heterogeneity in the amount of loans issued to affected industries to measure the variation in banks' exposure to the negative shock. Using bank-firm level credit register data from Turkey, we show that banks transmitted the shock by decreasing their loan supply not only to affected but also to unaffected industries. The effect persists at the firm level, yet is lower for large firms and for firms with an existing relationship to state-owned banks.

Climate Change and Bank Deposits, with Steven Ongena, CEPR Discussion Paper.

Abnormally warm temperatures are associated with an increase in people’s beliefs about climate change. Using branch-level deposit data from the United States, we find that depositors move their money away from fossil-fuel-financing banks when experiencing warmer-than-usual temperatures. This effect is more pronounced in counties with more climate change deniers, measured by the percentage of Republican voters in each county. Our results shed light on people’s responses to the impacts of global warming by studying the relationship between households’ beliefs about climate change and their non-financial preferences in their choice of bank for deposits. 

Green versus Sustainable Loans: The Impact on Firms' ESG Performance, with Steven Ongena and Gergana Tsonkova, CEPR Discussion Paper.

Short summary of the results: VoxEU column 

This paper studies the development of a firm’s Environmental, Social, and Governance (ESG) performance following the issuance of “green loans” earmarked for green projects versus “sustainable loans” to firms bench-marked by ESG criteria. Firms issuing green loans appear to be effective in shrinking their environmental emissions; however, they weaken in social performance indicated by a decrease in their human rights, community, and product responsibility scores. This implies that they prioritize their environmental goals, yet neglect their commitment towards their clients and society. Sustainable loans, on the other hand, we find to incentivize firms to improve their ESG performance by increasing their environmental and governance scores. Thus, the issuance of a sustainable loan surely precedes (and may consequentially signal) subsequent improvements in a firm’s overall ESG performance. 

How did Banks' ESG Conduct Affect Financial Performance and Lending during COVID-19?, with Joaquin Forchieri, Thomas Gehrig and Alexander Schandlbauer. 

This paper examines the link between ESG conduct and banks' stock performance during the COVID-19 crisis using a large global sample of banks. We find that a one standard deviation increase in a bank's ESG score is associated on average with a 0.14 percentage point lower daily stock returns during the onset of the COVID-19 pandemic. Examining the potential drivers behind the negative impact of the ESG conduct, we show that banks with a higher fraction of retail investors are more affected. Last, we provide evidence for a negative association between banks' ESG performance and their lending in times of COVID-19, which is again relatively more pronounced for banks with a higher share of retail ownership. 

Credit Market Competition and Bank Capitalization, with Thomas Gehrig, CEPR Discussion Paper.

We document that within regional U.S. mortgage markets an increase in competition exerts differential effects on banks with large and small market shares. Large market share banks reduce capitalization and increase risk taking as a response to an increase in the intensity of competition, while small market share banks enhance capitalization and reduce risk taking. These results are tied to market shares and not driven by bank size or the level of concentration within local regional markets.  

Permanent Working Papers

The Effect of Loan Sales on the Capital Structure of Banks

This paper addresses the question whether the existence of a secondary loan market changes the capital structure decision of banks. The results show that banks issue more debt if there is a secondary loan market in good times, when loans are sold at the fair price. The fair price ensures that an increase in investment increases the profit of the bank. On the other hand, banks issue less debt if there is a secondary loan market in bad times. This implies that the effect of loan sales on the bank's capital structure depends on the state of the economy. The bank engages in over-investment, if it can sell its loans in the secondary loan market in good times, as opposed to under investment in bad times. In summary, the existence of a secondary loan market amplifies the effects of booms and busts linked to macroeconomic cycles.

Equilibrium Effects of Liquidity Constraints

Investors do not internalize the interaction between debt accumulation and asset prices when they decide on their borrowing. This leads to credit expansions, which are mostly followed by a collapse in asset prices, so that it amplifies booms and busts in the economy. This paper studies welfare analyses of the macroprudential policy that limits the borrowing capacity of investors by regulating the loan-to-value ratio of the asset. The results show that investors' borrowing capacity should be limited during booms when investors are overoptimistic, whereas it should not be limited during busts when they are overpessimistic. Overall, the optimal macroprudential policy on the loan-to-value ratio of the asset is countercyclical: letting investors borrow as much as they can during a recession and limiting the loan-to-value ratio of the asset during an expansion.