Research
Selected Working Papers
Profit Shifting and Firm Credit (with F. Delis, M. Delis, L. Laeven and S. Ongena), (Link to SSRN)(Link to Swiss Finance Institute).
Profit shifting by multinational enterprises (MNEs) generates earnings but also carries risks. We examine how banks perceive this tradeoff in their credit decisions, mainly credit costs. Using novel profit shifting estimates for each MNE-year, we show that banks, on average, give favorable credit spreads and larger loan amounts to profit-shifting MNEs. This is in stark contrast to other tax evasion practices that yield the opposite results. However, the introduction of OECD’s Base Erosion and Profit Shifting (BEPS) introduced significant risk to profit-shifting, yielding increasing credit spreads and lowering loan amounts, especially where banks are less able to collect information.
Presented at: Central Bank of Ireland, CEPR ES Conference.
(In)dependent Central Banks (with V. Ioannidou, T. Lambert and A. Michaelides), (Link to CEPR) (Link to SSRN).
From the late 1980s, many countries have reformed the institutional framework governing their central banks to increase operational independence. Collecting systematic biographical information, international press coverage, and independent expert opinions, we find that over the same period appointments of central bank governors have become more politically motivated, especially after significant legislative reforms aiming to insulate central banks and their governors from political interference. We also show that politically motivated appointments reflect lower de facto independence, and are associated with worse inflation outcomes. Our findings inform the debate about political accountability and credibility in policy making at central banks.
Presented at: NBER SI 2024 (scheduled), EFA 2023, CEPR ES Conference 2022, CEPR PolEconFin 2022, ESCB 2022, HEC Paris, NYU-SAFE 2022.
It has also been featured on VoxEU, The Banker
Shock Absorbers and Transmitters: The Dual Facets of Bank Specialization (with R. Iyer, A. Michaelides and J.L. Peydro), (Link to SSRN).
This paper highlights the dual facets of bank specialization. After negative industry-specific shocks, banks specializing in an affected-sector act as shock absorbers, by increasing their lending to firms in that sector at lower interest rates than non-specialized banks. This lending is to firms with ex-post higher profitability, thus not consistent with zombie lending. However, when there are funding constraints, increased lending to the affected-sector by specialized banks is accompanied by a simultaneous cut in lending to unrelated-sectors, thereby transmitting the shock. These firms compensate by raising funds externally, however, in overall tight financing conditions, there are negative aggregate real effects.
Presented at: ASSA-IBEFA 2024, FIRS 23, ASSA-AEA 2023, IWH-EBRD (FINPRO 2022), FDIC Bank Research Conference, FINEST 2021, SDU.
FMARC 2022 Best Paper in Finance Award
Banking on Experience (with Q. Cao, H. Degryse and R. Minetti), (Link to CEPR)(Link to SSRN). To be submitted again
We study the impact of different dimensions of banks' experience on the extent of banks' moral hazard in loan markets. Using rich U.S. corporate loan-level data, we find that banks' prior experience with borrowers and co-lenders reinforces their monitoring incentives. Banks' sectoral experience, in contrast, appears to dilute monitoring incentives, calling for a larger lead share in the lending syndicate. In cross-sectional tests, we unpack experience into different dimensions and study to what extent the various components of lenders' experience improve credit market outcomes. The key to our identification strategy is that we exploit variation in experience for the same bank at a given point in time across firms, sectors and other banks. In addition, bank mergers are used as an instrument to identify exogenous shocks to the stock of bank's experience.
Presented at: Bristol Banking workshop, CEPR Swiss Winter Conference (Lenzerheide), 2020 Banca d'Italia.
It has also been featured on VoxEU
Distortive Effects of Deposit Insurance: Administrative Evidence from Deposit and Loan Accounts (with D. Cucic, R. Iyer, J.L. Peydro, and S. Pica).
This paper investigates the distortive impact of deposit insurance on deposit and credit allocation. Utilizing administrative datasets covering all household deposit and corporate credit accounts in Danish banks, we exploit salient changes to the deposit insurance limit after the Global Financial Crisis (GFC). A reduction in the deposit insurance limit prompts retail depositors to withdraw uninsured deposits and reallocate them to other banks to maintain insurance coverage. This disproportionately benefits banks most affected by the GFC, as they differentially raise interest rates to attract funding inflows. The reallocation of deposits has real consequences as exposed banks lend disproportionally to less profitable and less productive firms, which exhibit higher default rates ex-post. We quantify the resulting decrease in aggregate productivity and output. The continued accumulation of elevated credit risk on exposed banks' portfolios may contribute to future financial fragility.
Presented at: BIS-CEPR-SCG-SFI (Gerzensee) on FI, Board of Governors, Kentucky Finance Conference 24, 17th NY Fed / NYU Stern Conference on FI, Yale: Rethinking Optimal Deposit Insurance, EFA 2024 (scheduled), CEPR-BIS 24, ECB Research Conference 24 , MOFiR (scheduled), among others.
Networks and Information in Credit Markets (with A. Gupta, A. Michaelides and R. Minetti), (Link to CEPR), (Link to SSRN). Revision requested
A large theoretical literature emphasizes financial networks, but empirical studies remain scarce. We exploit the overlapping bank portfolio structure of US syndicated loans to construct a financial network and characterize its evolution over time. Using techniques from spatial econometrics, we find large spillovers in lending conditions from peers' decisions during normal times: a standard deviation increase in peer lending rates can increase a bank's lending rate by 17 basis points. However, these spillovers vanish in a large recession. We rationalize these findings through the lens of a model of syndicate lending, where banks' reliance on private signals rises during recessions.
Presented at: CBC 2020, 2020 World congress of the econometric society, 2019 FIRS conference , 2018 SFS Conference on ‘New Frontiers in Banking: from Corporate Governance to Risk Management’ (RFS), CEPR Annual Spring Symposium in Financial Economics, SED 2018, IBEFA 2018 (among others).
Unconventional Monetary Policy and the Search for Yield (with M. Delis and A. Kontonikas), (Link to SSRN). Revision requested
We use U.S. syndicated loan market data to examine how banks responded to the unprecedented injection of reserves by the Fed over several rounds of quantitative easing (QE). We show that higher reserves boost bank lending. To establish a causal interpretation for this finding, we construct a novel instrument for the bank-level exposure to QE by using confidential data on daily bank reserves. Next, we identify a mechanism that can explain this link. We show that the connection between banks' reserves and lending volume depends upon the net return that banks enjoy on reserve balances. Our findings demonstrate that the search for yield component of the risk taking channel---wherein banks increase risk-taking to achieve nominal profitability targets during periods of low interest rates---is also a relevant consideration for policymakers during massive reserve injections.
Presented at: ASSA-IBEFA 2022, FDCI Bank Research Conference 2021, SNB workshop, CEPR Endless Summer Conference, FINEST 2020, Bank of Finland (Suomen Pankki) 2019 (among others).
Real Effect of Imperfect Bank-Firm Matching (with M. Bruche, L. Farinha, E. Sette and S. Tsoukas), (Link to Banco de Portugal).
Using granular bank-firm level credit data, we show that the characteristics of bank-firm matches affect firms' access to credit and real outcomes during crises. We identify a set of potential matches in pre-crisis years, and we use them to predict match formation in crisis times. We generate a measure of ``imperfect matches" given by the difference between realized and predicted matches. In crisis times, imperfect matches deteriorate firm outcomes. The effects are economically important. A one standard deviation worsening in the index is associated with a drop in firms' employment, tangible assets, and survival by 0.9%, 2.7%, and 4.2%, respectively.
Presented at: IWH-WBED FINPRO 2022, IV Financial Stability, Pompeu Fabra, Finance Forum (Nova SBE), FMA2021, Banca d'Italia 2020, Banco de Portugal 2020 (among others).
Banking Structures, Liquidity and Macroeconomic Stability (with D. Hong, L. Araujo, and R. Minetti), DRAFT coming soon.
Banking is increasingly a complex activity. We investigate the output and welfare consequences of banking structures in an economy where lenders use information to screen investment quality and to recover value from failed investments. Complex banking (lenders’ joint production of information) eases information production but also facilitates the detection and liquidation of fragile investments. We find that complex banking enhances the resilience to small investment shocks but can amplify the output and welfare responses to large negative shocks. A larger complexity of investments preserves the stabilizing properties of complex banking following small shocks, but increases the chances that complex banking harms welfare after large shocks. The predictions are broadly consistent with evidence from matched bank-firm US data.
Financial Consolidation, Corporate Finance and Firm Investment in the Business Cycle (with T. Moreland and R. Minetti), (Link to SSRN).
We study the impact of the concentration and complexity of the banking sector on firms' financing and investment behavior over the business cycle. We find that, after the late 1990s, while debt issuance remained procyclical for US firms of all sizes, equity issuance and liquidity accumulation switched from countercyclical to procyclical for small and medium-sized publicly-traded firms. Using matched firm-bank data, we uncover evidence that bank consolidation contributed to this change. We rationalize these findings through a general equilibrium business cycle model with financial frictions calibrated to US data. After bank consolidation, the weakening in firms' bargaining power and relational ties with banks enhances firms' precautionary demand for liquidity and equity issuance incentives following positive shocks. The change in financing behavior increases investment sensitivity to aggregate productivity shocks.
Presented at: Rotterdam Corporate Finance Day, CEPR Endless Summer Conference, Midwest Macro 2019 (among others).