Carolina López-Quiles

Research Papers

Limited Liability, Strategic Default and Bargaining Power

(with Mirco Balatti)
ECB Working Paper No 2519 / January 2021

In this paper we examine the effects of limited liability on mortgage dynamics. While the literature has focused on default rates, renegotiation, or loan rates individually, we study them together as equilibrium outcomes of the strategic interaction between lenders and borrowers. We present a simple model of default and renegotiation where the degree of limited liability plays a key role in agents' strategies. We then use Fannie Mae loan performance data to test the predictions of the model. We focus on Metropolitan Statistical Areas that are crossed by a State border in order exploit the discontinuity in regulation around the borders of States. As predicted by the model, we find that limited liability results in higher default rates and renegotiation rates. Regarding loan pricing, while the model predicts higher interest rates for limited liability loans, we find no such evidence in the Fannie Mae data. We further investigate this by using loan application data, which contains the interest rates on loans sold to private vs public investors. We find that private investors do price in the difference in ex-ante predictable default risk for limited liability loans.

Deposit Insurance and Bank Risk-Taking

(with Matic Petricek)

Latest version: SSRN Working Paper

ADEMU Working Paper

In this paper we estimate the causal effect of deposit insurance on the risk-taking behaviour of banks. As shown in the theoretical literature, deposit insurance may induce moral hazard and incentivise banks to take on more risk. In this paper we provide an experimental setup in which we exploit an increase in the coverage limit of deposit insurance in the U.S. in order to identify the difference in risk taking by banks that were affected and banks that were not. This difference comes from the fact that state chartered savings banks in Massachusetts had unlimited deposit insurance coverage at the time when it was increased for all other banks in the US. Given that all banks in the sample are subject to the same regulatory and supervisory requirements, and that they are similar in other characteristics, we can isolate the effect of such increase in deposit insurance. We find, contrary to the literature, that this increase in deposit insurance did not increase bank risk-taking, nor did it affect market discipline, evident through a lack of effect on deposit rates.

Interest Rate Pass-Through in the Euro Area

In this paper I estimate the interest rate pass-through in the Euro Area using a confidential dataset from the European Central Bank with transaction level data on all money market transactions performed by the 52 largest banks in the Euro Area. This allows me to first, move beyond the use of an aggregate rate such as EONIA for pass-through estimation, and second, exploit the cross-sectional variation in collateral characteristics underlying each transaction as an instrument for identification of individual banks' money market rates. I find that the interest rate pass-through is smaller than estimated in the literature once confounding factors and reverse causality are addressed. I also find that banks pass on short term rates differently across economic agents (firms and households) and different maturities.

Policy Papers

Central bank digital currency and bank intermediation

ECB Occasional Paper No 293/May 2022

In July 2021 the Eurosystem decided to launch the investigation phase of the digital euro project, which aims to provide euro area citizens with access to central bank money in an increasingly digitalised world. While a digital euro could offer a wide range of benefits, it could prompt changes in the demand for bank deposits and services from private financial entities (ECB, 2020a), with knock-on consequences for bank lending and resilience. By inducing bank disintermediation, a central bank digital currency, or CBDC, could in principle alter the transmission of monetary policy and impact financial stability. To prevent this risk, options to moderate CBDC take-up are being discussed widely. In view of the significant degree of uncertainty surrounding the design of a potential digital euro, its demand and the prevailing environment in which it would be introduced, this paper explores a set of analytical exercises that can offer insights into the consequences it could have for bank intermediation in the euro area. Based on assumptions about the degree of substitution between different forms of money in normal times, several take-up scenarios are calculated to illustrate how the potential demand for a digital euro might shape up. The paper then analyses the mechanisms through which commercial banks and the central bank could react to the introduction of a digital euro. Overall, effects on bank intermediation are found to vary across credit institutions in normal times and to be potentially larger in stressed times. Further, a potential digital euro’s capacity to alter system-wide bank run dynamics appears to depend on a few crucial factors, such as CBDC remuneration and usage limits.

Stablecoins: Implications for monetary policy, financial stability, market infrastructure and payments, and banking supervision in the euro area

(ECB Crypto-Assets Task Force )

This paper summarises the outcome of an analysis of stablecoins undertaken by the ECB Crypto-Assets Task Force. At the time of writing, the stablecoin debate lacks a common taxonomy and unambiguous terminology. This paper applies a definition that distinguishes stablecoins from existing forms of currencies – regardless of the technology used – and characterises stablecoin arrangements based on the functions they fulfil. This approach emphasises the role of technology-neutral regulation in preventing arbitrage, as well as comprehensive Eurosystem oversight, irrespective of stablecoins’ regulatory status. Against this background, this paper assesses stablecoins’ implications for the euro area based on three scenarios for the uptake of stablecoins: (i) as a crypto-assets accessory function; (ii) as a new payment method; and (iii) as an alternative store of value. While the first scenario is merely the continuation of the current state of the market and, thus far, has not posed concerns for the financial sector and/or central bank tasks, stablecoins of the type envisaged in the second scenario may reach a scale such that financial stability risks can become material, and the safety and efficiency of the payment system may be affected. The third scenario is both the least plausible and the most relevant from a monetary policy perspective. The paper concludes that the Eurosystem relies on appropriate regulation, oversight, and supervision to manage the implications of stablecoins (and the risks that stem from them) on its mandate and tasks under plausible scenarios. The Eurosystem continues monitoring the evolution of the stablecoin market and stands ready to respond to rapid changes in all possible scenarios.

Lending standards and risk in Loan Level Data for the Euro Area

(with Marco Lo Duca and Marco Forletta)

This paper provides a cross-country analysis of the probability of default on residential mortgages using loan-level data of securitized loans originated in the largest countries of the Euro Area. The aim is to understand the determinants of default events, and in particular the link to “lending standards” (LTV, LTI and LSTI ratios), both from an ex-ante point of view, i.e. from loan and borrower characteristics and macroeconomic conditions at the origination phase, and ex-post, at time of default/repayment. The ultimate goal is to contribute to the debate on the effectiveness of borrower based measures and potentially inform the calibration of measures and their combinations. The results point towards a significantly higher probability of default for loans with high LTV and LTI ratios. Macroeconomic factors at origination have also a significant impact on default probabilities.