Research

Publications

"The internationalization of domestic banks and the credit channel of monetary policy" with Daniel Osorio and Juan Lemus and Miguel Sarmiento. Journal of Banking and Finance, Volume 135, 2022.

How does the expansion of domestic banks in international markets affect the bank lending channel of monetary policy? Using bank-firm loan-level data, we find that loan growth and loan rates from international banks respond less to monetary policy changes than domestic banks and that internationalization partially mitigates the risk-taking channel of monetary policy. Banks with a large international presence tend to tolerate more their credit risk exposition relative to domestic banks. Moreover, international banks tend to rely more on foreign funding when policy rates change, allowing them to insulate better the monetary policy changes from their credit supply than domestic banks. This result is consistent with the predictions of the internal capital markets hypothesis. We also show that macroprudential FX regulation reduces banks with high FX exposition access to foreign funding, ultimately contributing to monetary policy transmission. Overall, our results suggest that the internationalization of banks lowers the potency of the bank lending channel. Furthermore, it diminishes the risk-taking channel of monetary policy within the limit established by macroprudential FX regulations.

"Does the geographical complexity of the Colombian financial conglomerates increase banks’ risk? The role of diversification, regulatory arbitrage, and funding costs" with Pamela Cardozo, Andrés Murcia and Alejandra Rosado. Journal of Banking and Finance, Volume 134, 2021.

During the last decade Colombian international financial conglomerates (IFCs) expanded abroad, significantly increasing their geographical complexity. This paper analyzes the effect of changes in geographical complexity on the level of bank risk. We used the z-score as a measure of bank risk and as a measure of geographical complexity, the number of countries where a Colombian IFC has bank subsidiaries. Our results suggest that complexity is associated with higher levels of banks' risk, due to the Colombian expansion overseas to countries with large GDP co-movements and lower regulatory qualities. In addition, we found some evidence that complex banks increase their demand for external funds when the internal cost of capital increases. Moreover, local monetary policy affects the relationship between banking complexity and bank risk.

“Fear, Anger and Credit. On Bank Robberies and Loan Conditions” with Steven Ongena. Economic Inquiry, Volume 58, Issue 2. Media coverage: The Economist (12/9/2015).

We study the impact of emotions on real-world decisions made by loan officers by analyzing the loan conditions of loans granted immediately after a bank branch robbery. We find significant differences in conditions of the loans granted after a robbery (compared to changes in loan conditions that occur contemporaneously at unaffected branches) suggesting that loan officers do change their decisions following this event. In general loan officers seem to adopt so-called avoidance behavior: they decrease at once the likelihood of having contact with the client by lengthening the maturity of the loan contract and by demanding more collateral thereby reducing the probability of loan non-performance (and dealings with the client) prior to maturity. Loan officers also end up granting loans with somewhat softer loan conditions. Further in accordance with the literature on posttraumatic stress we find that the avoidance behavior that manifests itself in loan conditions is halved within two weeks after the robbery and that the effect further varies depending on the presence of a firearm during the robbery.


Other Publications

"An alternative methodology for estimating credit quality transition matrices" with JE Gómez-Gonzales, Fernando Pineda and Nancy Zamudio. Journal of Risk Management in Financial Institutions, Issue: Volume 2, Number 4, 2009

This study presents an alternative method of estimating credit quality transition matrices using a hazard function model. The model is useful both for testing the validity of the Markovian assumption, frequently made in credit rating applications, and also for estimating transition matrices conditioning on firm-specific and macroeconomic covariates that influence the migration process. The model presented in the paper is likely to be useful in other applications, although extrapolating numerical values of the coefficients outside of the present context is not recommended. Transition matrices estimated this way may be an important tool for a credit risk administration system, in the sense that a practitioner can use them to forecast the future behaviour of clients’ ratings, and their possible change of state.

"Bank lending channel of monetary policy: Evidence for Colombia, using a firms’ panel data" with JE Gómez-Gonzales. China-USA Business Review, Issue: Volume 8, Number 4,, 2009.

In this paper we find empirical evidence of bank lending channel for Colombia, using a balanced panel data of about four thousand non-financial firms. We find that increases in the interest rate, proxiing for the monetary policy instrument, lead to a reduction in the proportion of bank loans, out of total debt, of the firms. This bank lending channel amplifies the effect of the traditional interest rate channel, which leads to a reduction in total debt and spending when monetary policy tightens. Our evidence suggests that firm size matters in the transmission of monetary policy through the bank lending channel: Smaller firms have a higher probability of being credit rationed after a tightening of monetary policy than (otherwise identical) larger firms.


Working Papers

“Firms’ Strategic Choice of Loan Delinquencies” (revise and resubmit at the Review of Finance).

I analyze the repayment decisions of firms with multiple loans that, for liquidity constraints or strategic reasons, stop making payments in some but not all their loans. Using a sample of commercial loans from Colombia over the period 2002:03 – 2012:06, I find that firms are less likely to stop making payments on loans granted by banks with which they have long relationships and by banks with which they have a clean repayment history. These results suggest that firms are concerned with losing the benefits gained through the relationship. I also find that firms are more likely to stop making payments on loans from foreign banks when compared to domestic banks, and equally on loans from state owned banks when compared to private banks. This suggests that the ability and willingness of the bank to punish the firm for misbehaving play an important role in a firm’s decision. Overall, the results suggest that firms assess their delinquency choices based on their perceived ability to obtain new loans in the future.

“The Impact of Sharing Credit Information, Evidence from a Quasi-Experimental Variation” with Kasper Roszbach and Marieke Bos.

Around the globe, credit bureaus restrict the length of time that negative credit information of firms can be retained. The large variance in retention times across countries illustrates the lack of consensus on the optimal memory of negative information. By exploiting a variation in retention time of negative information for firms, provided by the introduction of the Habeas Data law in Colombia, we are able to analyze the causal link between the length of the credit bureaus retention time and the subsequent behavior by lenders and borrowers. The law was ratified in 2009 and prohibited institutions in Colombia to access the entire credit history of borrowers. Since then, the negative credit information is observable only for a period that depends on the length of the delinquency period. Our results, suggest that after the introduction of the Habeas Data law: i) the duration of loan delinquency periods is longer, ii) firms seem to strategically wait long enough, until their negative records disappear from the credit bureaus, before switching banks, iii) banks grant loans with higher spreads on interest rates, lower collateral requirements, larger loan amounts and longer maturities. In addition, we find empirical evidence of both ex ante and ex post theories of collateral.

"Spillover Effects of Foreign Monetary Policy on the Foreign Indebtedness of Banks and Corporations"

This paper analyses the impact of foreign monetary policy — from a broad range of countries — on the foreign indebtedness of Colombian banks and corporations, and evaluates if capital controls can help to mitigate these spillover effects. The paper uses two unique loan-level datasets on cross-border lending that cover all the foreign loans granted by foreign-located financial institutions to domestically located financial and non-financial companies, respectively. The results support the existence of spillover effects of foreign monetary policy over the characteristics of cross-border loans. In particular, periods of foreign monetary policy easing (tightening) are associated with: i) increases (decreases) on the cross-border lending to banks, and decreases (increases) on the cross-border lending to corporations; and ii) decreases (increases) on the loan interest rates to banks and corporations. The paper also finds that capital controls play an important role in mitigating these spillover effects, however, their effectiveness depends on the stance of both foreign and domestic monetary policy.


Book Chapters

“Competition in the Banking Sector” (with Hans Degryse and Steven Ongena) in Allen N. Berger, Philip Molyneux, and John O. S. Wilson, Oxford Handbook of Banking, Oxford University Press, 3nd edition, forthcoming.

“Competition in Banking” (with Hans Degryse and Steven Ongena) in Allen N. Berger, Philip Molyneux, and John O. S. Wilson, Oxford Handbook of Banking, Oxford University Press, 2nd edition, 589-617.


Publications (While at Central Banks)