Research

Working Papers

Relationship Lending and Monetary Policy Pass-Through [Job Market Paper], with Jin Cao and Karolis Liaudinskas

This paper investigates the link between bank-firm lending relationships and monetary policy pass-through, focusing on episodes of low interest rates. Using administrative tax and bank supervisory data ranging from 1997 to 2019, we track the entirety of bank-firm relationships in Norway. Our analysis shows that when the central bank's policy rate is relatively low, firms that have maintained a long-term relationship with their bank experience a lower pass-through of further policy rate cuts. Specifically, we find that when the policy rate is 1.09%, each additional year of relationship decreases the pass-through of a rate cut by 2.7 percentage points. We propose a theoretical model to rationalize our empirical findings, where state-dependent differential pass-through results from the presence of firms’ switching costs and banks’ leverage constraint. The model highlights that the composition of relationship lengths in the economy matters for aggregate monetary policy pass-through. The proportion of long-term relationships in the Norwegian economy significantly increased after the global financial crisis. Using the model, we calculate a counterfactual aggregate pass-through for 2017, a period of monetary easing in a low-rate environment, assuming this proportion had remained at its pre-crisis level. Our findings indicate a substantial increase in aggregate pass-through, on the order of 20%.

Loan Spreads and Interest Rates: The Role of The Deposit Channel and Lending Market Power, with Antoine Hubert de Fraisse

We present evidence that, in the French business lending context, loan spreads earned by banks over marketable interest rates are inversely related to the level of short-term interest rates. Controlling for the pricing of credit and interest rate risks, we show that this negative correlation aligns with a credit supply shock: banks that increase loan spreads more when interest rates decline also experience lower growth in credit volumes. Our findings provide empirical support for theories linking frictions in the deposit-taking business to the lending behavior of financially constrained banks. Specifically, lower rates compress deposit spreads earned by banks, prompting constrained banks to reduce lending, thereby explaining the rise in loan spreads. Additionally, we find evidence for a complementary channel: lending market power. In particular, lenders with higher market shares and borrowers facing a greater "hold-up problem" are associated with lower interest rate pass-through. Finally, we provide novel evidence of negative real effects on corporate financing and investment for firms borrowing from banks with reduced interest rate pass-through.

Bank Lending and the Intangible Economy [Draft Available on Request], with Claudia Gentile and Carlos Vasco Chironda

We investigate the consequences of a financial shock leading banks to decrease aggregate lending. We hypothesize that distressed banks discriminate between firms based on their intensity in intangible capital. We study this question in the context of the sovereign debt crisis in Italy, which peaked between 2010 and 2012 with two major Greek bailout programs, arguably exogenous to the state of the Italian economy and banking sector. We exploit regional variation in Italian banks’ exposure to this shock. The empirical evidence is consistent with our hypothesis: following a financial shock, banks decrease lending towards intangible-intensive firms relatively more. We use a two-period general equilibrium model to rationalize our empirical findings. Intangibility matters for bank lending because intangible capital has a lower collateral value than tangible capital. In times of financial distress, banks rebalance their loan portfolios towards firms offering safer collateral.

Research in Progress

Low Interest Rates, Monetary Policy Pass-Through, and Firm Market Power, with Alessandro Ferrari, Francisco Queiros, Jin Cao, and Karolis Liaudinskas

Digitization, Bank Branch Closures, and Monitoring, with Jin Cao and Karolis Liaudinskas