Inflation and floating rate loans: Evidence from the euro area (with F. Core, F. De Marco and T. Eisert)
We provide novel evidence on the supply-side transmission of monetary policy through a floating-rate channel. After a rate hike, firms with floating-rate loans may keep prices elevated to offset higher borrowing costs, thereby reducing the effectiveness of monetary policy. Using monthly data on product-level prices, industry-level inflation rates and the euro-area credit register from 2021 to 2023, we find that the short-run impact of monetary tightening on inflation is 50\% smaller when firms rely on floating-rate loans. This effect is stronger in concentrated, high mark-up markets, where firms can more easily pass on higher prices to their customers, as well as in markets with highly leveraged or illiquid firms. Since firms with floating-rate loans face an increase in their financial burden, their loan terms are more frequently renegotiated, often resulting in reduced spreads and a shift from floating to fixed rates. Overall, if firms across the euro area had a lower reliance on floating-rate loans, inflation would have been 0.8 percentage points lower in 2022-2023.
From purchases to exit: Central bank interventions in corporate debt markets* (with J. Breckenfelder)
Central banks increasingly act as market-makers-of-last-resort, yet the impact and exit of such interventions remain poorly understood. Using security-level data for the euro-area, we study a complete cycle of market freeze, central bank intervention, and exit in short-term debt markets. We find that a run on money market funds (MMFs)—key investors in firms' short-term debt—led to a market collapse in March 2020. Firms could replace only 27% of lost short-term funding from other sources like credit lines. The European Central Bank (ECB) intervened by purchasing firms' short-term debt, fully replacing MMF funding for some firms and allowing them to issue more debt at lower rates and longer maturities. When the intervention ended, more-exposed firms were adversely affected, facing an additional 20.2 basis points increase in yields and reduced MMF investment compared to less-exposed firms. Consequently, firms more reliant on the intervention encountered higher yields, decreased MMF investment, and fewer new relationships post-exit, suggesting a more challenging commercial paper market for those firms after the intervention ended.
*An earlier version of this paper circulated under the title "Non-bank liquidity provision to firms: Fund runs and central bank interventions"
Banks use synthetic risk transfers (SRTs) to sell the first loan portfolio losses to non-bank investors while retaining the loans on their balance sheets. This paper investigates this trillion-euro market, using transaction-level data on synthetically transferred loans in the euro area. We show in a difference-in-difference setting that less capitalized banks with riskier loan portfolios are more likely to do SRTs. A discontinuity in capital risk weights reveals that banks offload capital-expensive loans, which leaves them relatively less capitalized. SRTs are associated with increased and safer lending, higher dividend payments, and reduced monitoring. Although SRT investors have relatively low leverage, bank credit matters. Banks are more likely to sell SRTs to investors to whom they also lend credit, and total bank credit to these investors increases before the SRT investment, consistent with partial debt financing. Finally, thicker first-loss tranches, which are common in U.S. SRTs, are bought by more leveraged investors and have higher expected losses.
Banks can grant loans to firms bilaterally or in syndicates. We study this choice by combining bilateral loan data with syndicated loan data. We show that loan size alone does not adequately explain syndication. Instead, banks' ability to manage risks and firm riskiness drive the choice to syndicate. Banks are more likely to syndicate loans if their risk-bearing capacity is low and if screening and monitoring come at a high cost. Syndicated loans are more expensive and more sensitive to loan risk than bilateral loans. Our findings contradict the hypothesis that reputable borrowers graduate to the syndicated loan market.
The augmented bank balance-sheet channel of monetary policy (with C. Bittner, D. Bonfim, F. Heider, F. Saidi and C. Soares )
This paper studies how banks’ balance sheets and funding costs interact in the transmission of monetary-policy rates to banks’ credit supply to firms. To do so, we use credit registry data from Germany and Portugal together with the European Central Bank’s policy-rate cuts in mid-2014. The pass-through of the rate cuts to banks’ funding costs differs across the euro-area because deposit rates vary in their distance to the zero lower bound (ZLB). When the distance is shorter, banks’ financing constraints matter less for the supply of credit and there is more risk taking. To rationalize these findings, we provide a simple model of an augmented bank balance-sheet channel where in addition to costly external financing, there is screening of borrowers and a ZLB on retail deposit rates. An impaired pass-through of monetary policy to banks’ funding costs reduces their ability to lever up and weakens their lending standards.
Going green by putting a price on pollution: Firm-level evidence from the EU (with O. De Jonghe, and K. Mulier)
Emission trading schemes improve the emission efficiency of highly polluting firms. The efficiency gain comes from a relative decrease in emissions rather than a relative increase in operating revenue. Part of the improvement is realized via the acquisition of green firms. The size of the improvement depends on the initial allocation of free emission allowances: highly polluting firms receiving more emission allowances for free have a weaker incentive to become more efficient. For identification, we exploit the tightening in EU Emission Trading Scheme (ETS) regulation in 2017, which led to a steep price increase of emission allowances and made the ETS regulation more binding for polluting firms.