Job Market Paper:

Intermediary-Based Asset Pricing and the Cross-Sections of Exchange Rates (Online Appendix)

Abstract: I investigate whether fluctuations in the capital ratio of financial intermediaries provide an economic source of risk for the various cross-sections of exchange rate returns. I find that intermediary capital significantly prices the carry trade and the joint cross-section of a variety of currency portfolios, signifying the relevance of financial intermediaries as a fundamental economic source of global risk. I show that intermediary capital risk is a component of the previously identified high-minus-low (HML) carry factor of Lustig, Roussanov, and Verdelhan (2011), shedding light upon the economic sources of risk contained within this global risk factor. In addition, I show that intermediary capital serves as a relevant factor for the pricing of exchange rate risk when compared with the dollar and global dollar factors identified by Verdelhan (2018), shares common variation with the latter, and that the global dollar factor purged of US-specific risk helps price the full cross-section of foreign exchange portfolios.

Working Papers:

International Bank Lending and the October 2016 US Money Market Fund Reform

Abstract: US money market funds have been a key source of dollar funding for foreign banks. I examine whether the contraction of funding from prime funds due to the October 2016 US money market fund reform affected syndicated international dollar bank lending by foreign banks. I find that despite the large drop in funding from prime funds, partially offset by funding from government funds, the reform had no effect on the composition or volume of dollar lending. This is suggestive of foreign banks’ ability to substitute for dollar funding from other sources, in line with anecdotal evidence from the BIS (2017).

The Role of Dollar Funding and US Monetary Policy in International Bank Lending

Abstract: Given the dollar’s dominant role in international lending, I examine whether shocks to US monetary policy as measured by high frequency identification affect international lending by global banks, contingent on their reliance on dollar funding. I find that contractionary monetary policy shocks in the previous quarter decrease log international lending growth after controlling for confounding borrower demand shocks by utilizing borrower-country-quarter fixed effects a la Khwaja and Mian (2008). This effect is increasing in the fraction of dollar denominated liabilities in the lender country’s banking system, a proxy for reliance on dollar denominated funding. This result remains robust to controls and sector fixed effects and I find that results are driven by a decline in lending to non-bank private sector and banking sector counterparties.

A Bank-Level Analysis of the Bank-Sovereign Nexus (joint with Romain Bouis)

Abstract: We identify an unconditional negative relationship between banks’ holdings of government securities and credit growth across a wide panel of banks across 20 years and over 150 countries. We find that this aspect of the bank-sovereign nexus is primarily attributed to portfolio rebalancing rather than crowding out due to moral suasion. Banks substitute away from loans towards holdings of government securities at times of distress precisely when non-performing loan ratios are high, an indication of poor quality of available lending projects and borrower quality. Using system GMM, we show that banks increase their holdings of government securities following years of high NPL ratios and are more profitable in the year following this increase in holdings, suggestive of optimal rebalancing.