This paper examines whether banks strategically incorporate their competitors’ liquidity mismatch policies when determining their own and how these collective decisions impact financial sector stability. Using a novel identification strategy exploiting the presence of partially overlapping peer groups, I show that banks’ liquidity transformation activity is driven by that of their peers. These correlated decisions are concentrated on the asset side of riskier banks and are asymmetric, with mimicking occurring only when competitors are taking more risk. Accordingly, this strategic behavior increases banks’ default risk and overall systemic risk, highlighting the importance of regulating liquidity risk from a macroprudential perspective.

Conference and Seminar Presentations: Federal Reserve Board (US), Universitat Pompeu Fabra (Spain), University of Oxford (UK), Nova SBE (Portugal), INSEAD (France), Rotterdam School of Management (Netherlands), Warwick Business School (UK), Queen Mary University of London (UK), KU Leuven (Belgium), Bank of England (UK), European Central Bank (Germany), NYU/UoF 8th International Risk Management Conference (Luxembourg), 1st IWH/FIN/FIRE Workshop on Challenges to Financial Stability (Germany), University of Cambridge/FNA Financial Risk and Networks Conference (UK), Bank of Finland/ESRB/RiskLab Conference (Finland), Banco de México/CEMLA/University of Zurich Conference (Mexico), 4th EBA Policy Research Workshop (UK), Federal Reserve Bank of Cleveland/OFR 2015 Financial Stability Conference (US), 2017 AEA Annual Meeting (US), 5th MoFiR Workshop on Banking (US), CEPR/Bank of Israel Conference on Systemic Risk and Macroprudential Policy (Israel)

Coverage: ECB Task Force on Systemic Liquidity, Deputy Governor of the Central Bank of Ireland (Sharon Donnery)

We analyze the credit supply and real sector effects of bank bail-ins by exploiting the unexpected failure of a major Portuguese bank and subsequent resolution. Using a matched firm-bank dataset on credit exposures and interest rates, we show that while banks more exposed to the bail-in significantly reduced credit supply at the intensive margin, affected firms compensated the tightening of overall credit with other sources of funding. Nevertheless, SMEs were subject to a binding contraction of funds available through credit lines and reduced investment and employment. These dampening effects are explained by the pre-shock internal liquidity position of smaller firms.

Conference and Seminar Presentations: 2nd CEPR Annual Spring Symposium in Financial Economics (UK), De Nederlandsche Bank/EBC/CEPR Conference (Netherlands), 5th Emerging Scholars in Banking and Finance Conference (UK), Columbia Business School (US), International Monetary Fund (US), 32nd EEA Conference (Portugal), 4th Bank of Canada/Bank of Spain Workshop (Canada), Single Resolution Board (Belgium), 9th European Banking Center Network Conference (UK), Deutsche Bundesbank/IWH/CEPR Conference (Germany), Basel Committee on Banking Supervision/CEPR Joint Workshop (Switzerland), BI Norwegian Business School (Norway), Bank of Italy (Italy), 4th Workshop of the Empirical Financial Intermediation Research Network (Belgium), Sydney Banking and Financial Stability Conference 2017 (Australia), 2018 AFA PhD Poster Session (US), Universidad Carlos III de Madrid (Spain), 11th Swiss Winter Conference on Financial Intermediation (Switzerland), 2018 Fixed Income and Financial Institutions Conference (US), Bank of England (UK), University of Bonn (Germany), 2018 Luso-Brazilian Finance Meeting (Brazil), 2018 Sapienza/BAFFI CAREFIN/RFS Conference (Italy), 2018 FIRS Conference (Spain), 17th CREDIT Conference (Italy), ABFER/CEPR/CUHK First Annual Symposium in Financial Economics (Hong Kong), 45th EFA Annual Meeting (Poland), 2019 Federal Reserve "Day-Ahead" Conference (US), Columbia University/BPI 2019 Research Conference (US)

Coverage: Wall Street Journal, VoxEU, Eurointelligence, Mondovisione, ECO (Portuguese), Jornal de Negócios (Portuguese - online, paper and front page), Bank of Portugal - Economics Synopsis

We examine the impact of a large-scale microcredit expansion program on financial access and the transition of previously-unbanked borrowers to commercial banks. Using administrative data on the universe of loans from a credit register accessible to all lenders, we show that the program improved access to credit, especially in underdeveloped areas, with positive effects on business and mortgage lending. The program also generated positive spillovers to the commercial banking sector. As the newly-created microfinance institutions (MFIs) faced lending constraints, a sizable share of first-time borrowers obtained subsequent loans—that were larger, cheaper, and longer-term—from commercial banks, which expanded their branch network in under-served low-risk areas. The individuals switching from MFIs to banks were less risky than non-switchers and not riskier than existing bank borrowers. Overall, our results suggest that the microfinance sector, coupled with a credit reference bureau, can mitigate information frictions in credit markets and serves as a pathway for first-time borrowers to commercial banks.

Conference and Seminar Presentations: University of Chicago Consumer Finance Conference (US), 2019 FIRS Conference (US), IMF-DFID Conference on Financial Inclusion: Drivers and Real Effects (US), CSAE Oxford Conference 2018 (UK), 2018 Development Economics and Policy Conference (Switzerland), 7th Navarra Center For International Development Research Workshop (Spain), Villanova University (US), International Monetary Fund (US), National Bank of Rwanda (Rwanda), 2018 Africa Meeting of the Econometric Society (Benin), 1st Endless Summer Conference on Financial Intermediation and Corporate Finance (Cyprus), 33rd European Economic Association Conference (Germany), 8th International Research Workshop in Microfinance (Norway), 6th Emerging Scholars in Banking and Finance Conference (UK), IBEFA-ASSA Meeting 2019 (US), MFA 2019 Annual Meeting (US), Trinity College Dublin (Ireland), Reserve Bank of India/Imperial College London Conference on Financial Intermediation in Emerging Markets (India), 12th Swiss Winter Conference on Financial Intermediation (Switzerland), Chicago Financial Institutions Conference 2019 (US), 2019 NOVAFRICA Conference on Economic Development (Portugal), 13th Luso-Brazilian Finance Meeting (Portugal), CUHK-RCFS Conference on Corporate Finance and Financial Intermediation (Hong Kong)

- Scheduled: 46th EFA Annual Meeting (Portugal)

Coverage: VoxDev, VoxEU

(4) Completing the Banking Union with a European Deposit Insurance Scheme: Who is Afraid of Cross-subsidisation?, with J. Carmassi, S. Dobkowitz, J. Evrard, L. Parisi, and M. Wedow

R&R (2nd round) at the the Economic Policy

This paper investigates the impact and appropriateness of establishing a fully mutualised European Deposit Insurance Scheme (EDIS) using a unique supervisory micro-level dataset on euro area banks’ covered deposits and other liabilities. Our main findings are as follows: first, an ex-ante funded Deposit Insurance Fund (DIF,) with a target size of 0.8% of euro area covered deposits, would be sufficient to cover losses even in a severe banking crisis. Second, we show possible ways of calibrating risk-based contributions to the DIF according to different sets of bank-specific and country-specific factors: this would allow taking into account the relative riskiness that they pose to EDIS, thus contributing to addressing moral hazard concerns stemming from moving from national to a European scheme. Third, smaller and larger banks would not excessively contribute to EDIS relative to the amount of covered deposits in their balance sheet. Finally, there would be no unwarranted systematic cross-subsidisation within EDIS in the sense of some banking systems systematically contributing less than they would benefit from the DIF.

Other Policy and Pre-PhD Publications: