Journal & Book Publications

Abstract: This paper assesses the state and resilience of corporate and banking sectors in the Middle East and North Africa (MENA) in a “higher-for-longer” interest rate environment using granular micro data to conduct the first cross-country corporate and banking sector stress tests for the MENA region. The results suggest that corporate sector debt at risk may increase sizably from 13.5 in 2023 to nearly 33 % of total corporate debt by the end of 2025. Banking systems would be broadly resilient in an adverse scenario featuring higher interest rates, corporate sector stress, and rising liquidity pressures with Tier-1 capital ratios declining by 3.4 percentage points in the Gulf Cooperation Council (GCC) countries and 4.5 % age points in non-GCC MENA countries. In the cross-section of banks, there are pockets of vulnerabilities as banks with higher ex-ante vulnerabilities and state-owned banks suffer greater losses. While manageable, the capital losses in the adverse scenario could limit lending and adversely impact growth. 

Abstract: This paper introduces a comprehensive database of macroprudential policies, which covers 134 countries starting January 1990. Using a novel numerical indicator of the tightness of loan-to-value (LTV) regulations, we estimate the policy effects of incremental tightening in LTV limits, employing a propensity-score-based method to address endogeneity concerns. The results point to economically significant and nonlinear effects, with a declining per-unit impact for larger tightening measures. The analysis of household credit indicates that policy leakage effects could be a factor behind the nonlinear effects. We finally find that the side effects of macroprudential policies on consumption and output are relatively small.

Abstract: To quantify downside risks to housing markets, we apply and extend the house price-at-risk (HAR) methodology to a sample of 37 cities across the United States and Canada using quarterly data from 1983 to 2018. Our findings suggest that downside risks to housing markets in the United States have seemingly fallen after the global financial crisis, while having increased in Canada. Local factors such as supply availability and valuation proxies are found to be significantly associated with future downside risks to major housing markets, but their effect varies across cities and horizons. Additionally, macro-financial drivers such as household debt, capital flows, and financial conditions play a key role in forecasting house price risks. Using micro-level data from California, we highlight the heterogeneity of tail risks across counties and the role played by local factors in forecasting housing risks.

Abstract: This paper explores how global financial conditions influence corporate leverage growth in emerging markets (EMs). Using a sample of 800,000 listed and non-listed firms across 28 EMs, we find that accommodative global financial conditions—initially proxied with a measure of U.S. monetary policy—are associated with faster leverage growth. This impact is more pronounced for financially constrained firms, such as small- and medium-sized enterprises (SMEs), and for EMs whose domestic monetary policy is more aligned with that of the United States. The findings suggest that global financial conditions affect EM firms’ leverage growth by influencing domestic interest rates and by relaxing corporate borrowing constraints. Finally, leverage increases disproportionately more for firms that are either relatively less profitable or less solvent when global financial conditions become looser. 

Abstract: This paper analyses the trade-offs between savings, debt, public investment and capital sustainability in a developing country with looming oil exhaustibility concerns. We find that an optimal policy that maximizes welfare and preserves capital and fiscal sustainability involves a moderate scaling-up of public investment in the short term. Alternative public investment paths are shown not to be optimal as they either create risks to capital and fiscal sustainability or do not fully harness the oil revenue windfall. We also show that there are large welfare gains for low-income countries from structural reforms that improve the efficiency of public investment and the project selection process. Finally, the paper highlights the fiscal and debt sustainability risks from volatile oil prices and inadequate fiscal adjustment. 

Abstract: We look at the effect of capital rules on a banking system that is connected through correlated credit exposures and interbank lending. Keeping total capital in the system constant, the reallocation rules, which combine individual bank characteristics and interconnectivity measures of interbank lending, are to minimize a measure of system-wide losses. Using the detailed German credit register for estimation, we find that capital rules based on eigenvectors dominate any other centrality measure, saving about 15 percent in expected bankruptcy costs. 

Abstract: In this paper we modify and extend the framework of Diebold and Yilmaz (2011) to quantify spillovers between sovereign credit markets and banks in the euro area. Spillovers are estimated recursively from a vector autoregressive model of daily changes in credit default swap (CDS) spreads with exogenous common factors. We account for interdependencies between sovereign and bank CDS spreads and derive generalized impulse response functions. Specifically, we assess the systemic effect of an unexpected shock to the creditworthiness of a sovereign or country-specific bank index on other sovereigns and bank CDSs between October 2009 and July 2012. Channels of shock transmission from or to sovereigns and banks are summarized in a Contagion Index and its four components: (i) among sovereigns, (ii) among banks, (iii) from sovereigns to banks, and (iv) from banks to sovereigns. We also highlight the impact of policy-related events on the Contagion Index. 

Abstract: We investigate the interdependence of the default risk of several Eurozone countries (France, Germany, Italy, Ireland, the Netherlands, Portugal, and Spain) and their domestic banks during the period between June 2007 and May 2010, using daily credit default swaps (CDS). Bank bailout programs changed the composition of both banks’ and sovereign balance sheets and, moreover, affected the linkage between the default risk of governments and their local banks. Our main findings suggest that in the period before bank bailouts the contagion disperses from bank credit spreads into the sovereign CDS market. After bailouts, a financial sector shock affects sovereign CDS spreads more strongly in the short run. However, the impact becomes insignificant in the long term. Furthermore, government CDS spreads become an important determinant of banks’ CDS series. The interdependence of government and bank credit risk is heterogeneous across countries, but homogeneous within the same country. 

Abstract: This chapter introduces a new comprehensive database of macroprudential policies (iMaPP), which combines information from various sources and covers 134 countries from January 1990 to December 2021. Using these data, we first confirm that loan-targeted instruments have a significant impact on household credit, and a milder, dampening effect on consumption. Next, we exploit novel numerical information on loan-to-value (LTV) limits using a propensity-score-based method to address endogeneity concerns. The results point to economically significant and nonlinear effects, with a declining impact for larger tightening measures. Moreover, the initial LTV level appears to matter; when LTV limits are already tight, the effects of additional tightening on credit is dampened while those on consumption are strengthened.

Abstract: Higher household debt is associated with lower future GDP growth in a broad set of 80 countries over the period 1950–2016. Several institutional factors, such as flexible exchange rates, capital account openness, higher financial development and inclusion, mitigate this negative relationship. Three mutually reinforcing mechanisms help explain this relationship. First, increases in household debt amplify the probability of future banking crises, which significantly disrupts financial intermediation. Second, crash risks may be systematically neglected due to investors’ overoptimistic expectations associated with household debt booms. Third, debt overhang impairs household consumption when negative shocks hit.