Working Papers
The role of firms' characteristics on banks' interest rates , 2024
Abstract: This article investigates the importance of firms’ characteristics in determining loan pricing by banks, both in the cross-section and over time in Portugal. A particular emphasis is placed on three financial aspects of firms: indebtedness, liquidity, and profitability. On average, the interest rate charged on new loans tends to increase with the level of firm indebtedness and decrease as liquidity and profitability rise. For micro and small firms, banks are more reactive to their leverage and less reactive to their measures of liquidity and profitability compared to medium-sized firms. For big firms, banks’ loan pricing does not react to changes in their leverage or liquidity. however changes in their profitability have a stronger impact. Regarding firms’ age, it is observed that throughout a firm’s life cycle, banks’ loan pricing places greater emphasis on the level of debt for younger firms, shifting focus to profitability as firms mature. Additionally, the study demonstrates that the sensitivity of banks’ pricing to firms’ financial conditions changes over time and depends on the macroeconomic and financial environment. During periods of high uncertainty or tight financial conditions, banks tend to be stricter in pricing firm leverage, resulting in higher interest rates compared to more stable periods. Banks become more attentive to firms’ liquidity in times of tight financial conditions. Furthermore, during periods of lower economic growth, banks show increased sensitivity to firm profitability, whereas in environments of high interest rates, this sensitivity is reduced.
Insurance Corporations' Balance Sheets, Financial Stability and Monetary Policy, 2024 with Christoph Kaufmann and Manuela Storz
(ECB Working Paper No. 2892) (SUERF Policy Brief)
Abstract: The euro area insurance sector and its relevance for real economy financing have grown significantly over the last two decades. This paper analyses the effects of monetary policy on the size and composition of insurers’ balance sheets, as well as the implications of these effects for financial stability. We find that changes in monetary policy have a significant impact on both sector size and risk-taking. Insurers’ balance sheets grow materially after a monetary loosening, implying an increase of the sector’s financial intermediation capacity and an active transmission of monetary policy through the insurance sector. We also find evidence of portfolio rebalancing consistent with the risk-taking channel of monetary policy. After a monetary loosening, insurers increase credit, liquidity and duration risk-taking in their asset portfolios. Our results suggest that extended periods of low interest rates lead to rising financial stability risks among non-bank financial intermediaries.
Sudden Stops: Consequences, Asymmetries and Policy Implications, 2021 (Download)
Abstract: Sudden stops are times in which countries that are heavily dependent on foreign resources experience a substantial decline in capital inflows, resulting in a negative impact on economic activity. We use propensity score methods with local projections to identify sudden stops triggered by shocks exogenous to macroeconomic outcomes and measure their dynamic effect. Our findings show that the most painful effects of a sudden stop are not on impact but three quarters after the start of the episode. We estimate an overall GDP growth loss of 9.2% two years after the event. We also show that inverse propensity weighting with regression adjustment provides a better identification of sudden stop cost compared with linear regression estimation. Afterward, we analyze state-dependent reactions to sudden stops based on ex-ante characteristics: we find that sudden stops episodes preceded by capital inflow booms are more painful than those without them. The potential cost of a sudden stop is also linked to different allocations of foreign banking debt or total debt across sectors. Moreover, the maturity and currency composition of the external debt will shape the dynamic cost of large falls in capital inflows. These nonlinearities raise new challenges that should be taken into account by policymakers when designing policy responses to a large fall in capital inflows.
Sudden Stop Types and External Balance Sheet Structure, 2019 (Download)
Abstract: In the 1990s significant falls in gross capital inflows became net flows decreases (Classic Sudden Stop). However, the upward trend in financial openness has resulted in a higher proportion of foreign assets in the domestic investor portfolio, raising their ability to provide global liquidity during sudden stops in gross inflows (Prevented Sudden Stop). We measure the dynamic average treatment effect of classic and prevented sudden stops on macroeconomic aggregates and show that classic episodes are more costly than prevented ones. Therefore, we examine how the potential capacity to prevent sudden stops in net flows is related to the structure and composition of external balance sheets. We find that countries with a large amount foreign assets (net creditors) have a higher capacity to repatriate their foreign holdings during decreases in gross inflows. With regard to the composition of foreign assets and liabilities, we find that debt positions play an important role in assessing the transition from a classic episode to a prevented one, while equity positions are not significant. We also show that the importance of foreign debt positions is driven by other investment assets (loans and deposits), which are a very volatile component of foreign borrowing. Finally, our study also shows that countries more likely to experience classic sudden stops held a bigger share of reserves over GDP. This suggests that countries where the local investor does not play the role of marginal investor, it is the government/central banks that are preparing to fight sudden stop episodes.
Structural Change and the Global Financial Cycle in International Banking Flows, 2018 (Download)
Abstract: The Great Financial Crisis of 2008 revived interest in understanding how global economic and financial shocks generate significant capital flow movements. We measure the changing importance of global shocks to explain international banking flow fluctuations, and show that the structural change in financial openness and financial development during the last decades is related to their time-varying reaction to push factors. Using a Dynamic Factor Model with time-varying parameters for a panel of developed and developing countries, we prove that developing countries have experienced a strong increase in the sensitivity to global shocks, while the developed ones have more stable exposures. Estimation methods not taking into account the structural break between the effect of the global factor and cross-border banking flows are going to underestimate the importance of global shocks. Finally, using a cointegration analysis we prove that the higher importance of global shocks is related with a higher level of financial openness, while greater levels of financial development are negatively related to them.
Boom-Bust Cycles in International Capital Flows and Fiscal Spending, 2019 (Download)
Abstract: High global liquidity periods are linked to booming business cycles around the globe, but when this trend is reversed, classic Sudden Stop dynamics begin. In a framework that endogenously allows for the real / financial boom-bust cycles that economies encounter in different global liquidity transitions, we study the effectiveness of fiscal spending to mitigate the effects of Sudden Stops. The benefits of the fiscal intervention depends on the government’s ability to release the borrowing constraint through the real exchange rate during moments of crises. We find three important aspects determining the effectiveness of the fiscal intervention: First, the structure of the fiscal spending between tradable and non-tradable goods determines the gains of the fiscal intervention. Secondly, the share of total income that serves as pledgeable income is a determinant parameter in explaining the effects of fiscal spending during Sudden Stops. Another aspect one should consider is that the magnitude of fiscal intervention matters to mitigate the effects of Sudden Stops. Small interventions in size will not be able to produce significant effects in order to improve the macroeconomic outcomes. Finally, the fiscal spending intervention is able to improve twice the welfare compared with the macroprudential policies in our framework.
Ongoing Projects
Recovery rates estimation, 2024 with Tiago Pinheiro
Policy work
The recovery database using the Portuguese Credit Register, 2024 with Tiago Pinheiro
Using loan-level data for firms and individuals, we track defaulted loans across their life history and compute recovery rates. Various events are considered in the recovery computation, such as loan renegotiation, loan consolidation, collateral execution, loan sales, etc. The dataset is updated monthly, with information available from September 2018 onwards. An extension of our methodology to the old credit register allows us to compute recoveries rates for loans that entered in default between 2009 until September 2018.
O papel das caraterísticas das empresas na determinação das taxas de juro dos empréstimos bancários, 2024 , Relatório de Estabilidade Financeira, Tema em Destaque (Special Feature), páginas 99-110, Banco de Portugal, Maio 2024 (link)
Insurers’ balance sheets amid rising interest rates: transmission and risk-taking, 2022 with Christoph Kaufmann and Manuela Storz, Financial Stability Review, Box 4, pages 79-81, European Central Bank, November 2022 (link)