Publications

1. Steering a Ship in Illiquid Waters: Active Management of Passive Funds Review of Financial Studies, 2025
   joint with Yiming Ma, Lubos Pastor, and Yao Zeng

   • Exchange-traded funds (ETFs) are typically viewed as passive index trackers. In contrast, we show that corporate bond ETFs actively manage their portfolios, trading off index tracking against liquidity transformation. In our model, ETFs optimally choose creation and redemption baskets that include cash and only a subset of index assets, especially if those assets are illiquid. Our evidence supports the model. We find that ETFs dynamically adjust their baskets to correct portfolio imbalances while facilitating ETF arbitrage. Basket inclusion improves bond liquidity in general, but worsens it in periods of large imbalance between creations and redemptions, such as the COVID-19 crisis.

   • Mentioned by: Becker Friedman Institute , Chicago Booth Review , Knowledge@Wharton , Financial Times, ETF Stream.

   • Presented at: 2023 FIRS, 2023 AFA, 2022 Conference on Financial Economics and Accounting, 2022 Fixed Income and Financial Institutions Conference, 2022 Four Corners Index Investing Jamboree, 2022 Minnesota Corporate Finance Conference, 2022 Toronto Junior Finance/Macro Conference, 2022 MIT Sloan Junior Finance Conference, Chicago, Columbia, Florida, HKUST, Indiana, LSU, New York Fed, Notre Dame, SAIF, TMX Market Forum, UNC, USC, UT Dallas, Wharton, NBER New Developments in Long-Term Asset Management Spring 2024. 

Working Papers

1. Destabilizing Digital "Bank Walks" R&R, Journal of Finance
   joint with Tano Santos and Luigi Zingales

   • We study the impact of digital banking on the value of the deposit franchise and the stability of the banking sector. Using the classification of digital banking in Koont (2023), we find that when the Fed funds rate increases, deposits flow out faster, and the cost of deposits increases more in banks that offer a mobile app and brokerage services. Using the model of Drechsler et al. (2023b), we find that correcting for digital betas and deposit outflows results in a deposit franchise value that is 14-22% lower for digital-broker banks relative to traditional banks. Moreover, we find that digital-broker banks’ deposit franchise values increase by less when interest rates rise, serving as less of a hedge. We apply this analysis to the case of Silicon Valley Bank (SVB) and find that the reduced value of the deposit franchise can explain why SVB was insolvent in early March 2023, even before the bank run occurred.

   • Mentioned by: ProMarket, The Economist, Forbes.

   • Presented at: NBER SI 2023 Risks of Financial Institutions, OCC, Maryland, NYU Five Star Conference, IESE Barcelona Workshop on Banking Turmoil and Regulatory Reform.
     
     

2. The Declining Role of Deposits in Credit Creation (New!)
   joint with Stefan Walz

   • Does deposit funding still drive credit creation? Deposit inflows affect credit directly, through banks' balance sheet response, and indirectly, through a feedback loop in which credit generates new deposits. Using exogenous deposit shocks and a structural model, we show that the total bank-credit impact of a $1 deposit inflow has fallen from $2.13 to $0.88 over two decades. Both channels have weakened: banks extend less credit out of each marginal deposit, reflecting greater costs of balance sheet expansion, and fewer credit proceeds recycle into stable deposits, consistent with declining deposit specialness and a greater use of non-bank alternatives. Central bank policy also matters: Quantitative Easing lowers the credit impact of a marginal deposit through higher capital costs, while Quantitative Tightening can raise it through scarcer liquidity. We show that non-bank credit is unlikely to offset the decline. These findings point to an implicit narrowing of banking that dampens credit creation and reshapes monetary and fiscal policy transmission.

3. How Does the Digital Revolution Alter Competition in Banking? 

   • This paper studies how digital banking has reshaped competition in the U.S. banking sector. I document three core facts: (i) digital adoption enables banks to branchlessly expand their geographic reach; (ii) it most strongly boosts growth for banks with high quality digital platforms and without national branch networks; and (iii) it shifts balance sheets toward uninsured deposits and away from low-income lending. To quantify aggregate effects, I build and estimate a structural model of endogenous technology adoption and competition. Counterfactuals show that digitalization increases local and national competition and consumer surplus, but disproportionately benefits wealthier customers and increases banks' reliance on flightier funding. Digitalization contributes to the rise of "too-many-to-fail" institutions through the growth of mid-sized banks and may, in the future, reduce national competition if digital quality becomes more dispersed, exhibits more complementary with branches, or enables larger scale efficiencies.

   • Winner: 

     1. HEC Paris Top Finance Graduate Award 2024

     2. Bernstein Center Doctoral Grant 2021 (video)

     3. Columbia Finance Department Best 4th Year Paper 2021

   • Presented at: 20th Macrofinance Society Workshop (poster), Federal Reserve Board, Columbia, Colorado Finance Summit 2023, Hoover Institution Working Group on Financial Regulation, Maryland, Cornell, Duke, UT Austin, Ohio State, Yale, NYU, Chicago, Northwestern, Toronto (Economics), UCLA, UW, UCL (Economics), LSE, LBS, Stanford, UCSD, UPF, FIRS 2024, Banque de France Academic Conference on Digital Currency and the Financial System, SED 2024.
     
     

4. A New Theory of Credit Lines (With Evidence)
   joint with Jason R Donaldson, Giorgia Piacentino, and Victoria Vanasco

   • We develop a model that suggests a heretofore unexplored role of credit lines: To mitigate debt dilution. The results give a new perspective on the literature on leverage ratchet effects, suggesting they can be curbed by (latent) credit lines, and on latent contracts, suggesting collusive outcomes are unlikely to arise in dynamic environments. The model explains numerous facts, including why credit lines are pervasive but rarely drawn down and why they are bundled with loans, especially for riskier borrowers. We find that the risk of credit line revocation increases borrower leverage and riskiness, suggesting that limited bank commitment can contribute to corporate distress. We find empirical support for this prediction.

   • Presented at: 2023 Fixed Income and Financial Institutions Conference, Bonn, Manheim, UCLA, USC, 2024 Jackson Hole Finance Group Conference, University of Kentucky Finance Conference, BIS-CEPR-SCG-SFI Conference on Financial Intermediation, FIRS 2024, WFA 2024, NBER SI 2024 Corporate Finance.
     
     

5. Peer Effects in Deposit Markets
   joint with Kim Fe Cramer

   • We provide first empirical evidence that consumer peer effects matter for banks' deposit demand. Using a novel measure that depicts for each county how exposed peers are to a specific bank in a given year, we tightly identify the causal effect of peer exposure on deposit demand through a fixed effects identification strategy. We address key empirical challenges such as time-invariant homophily. We find that a one percent increase in a bank's peer exposure leads to a 0.05 percent increase in deposit market share. This effect has become stronger over time with the rise of the internet and social media, which facilitate cross-county communication. Peer exposure is especially relevant for smaller banks and customers that have access to the internet.

Policy Publications

1. Bank Credit Provision and Leverage Constraints: Evidence from the Supplementary Leverage Ratio Covid Economics 72, 2021, CEPR
   joint with Stefan Walz

1. • We identify the implications of relaxing the Supplementary Leverage Ratio in April 2020 for bank balance sheet composition and credit provision. Our findings suggest that this risk-invariant leverage ratio was binding for banks, weakly affected bank liquidity provision in Treasury markets, and strongly affected banks' portfolio composition across asset classes, amounting to a shift of banks' loan supply schedules. The increase in lending is driven primarily by real estate and personal loans, and to a lesser extent by commercial and industrial loans. We additionally provide evidence that the relaxation allowed banks to increase their repo borrowing from cash providers. Our evidence highlights that countercyclical relaxation of uniform leverage constraints can increase bank credit provision during economic downturns, in line with a precautionary cash holdings mechanism. Given the binding nature of the SLR, the relaxation of this constraint may be more effective than other countercyclical measures in allowing banks to extend credit.