Impact of Bail-in on Banks' Bond Yields and Market Discipline, 2017 (Job Market Paper)
The bail-in mechanism limits government's assistance for banks by restricting the access of equity and unsecured debt to rescue plans. In the context of such a crucial "regime shift" for the banks' bonds, this paper studies for the first time how the bond markets react to this reform. The analysis of the bond market allows an appropriate identification of the effects of the bail-in events on the bail-in expectations and on the market discipline.
I analyze the events regarding both the legislative process and the impositions of bail-in on distressed banks; I test if these indications of authorities' commitment to the bail-in principle were credible enough to determine a repricing of existing bonds. Heterogeneous and staggered difference-in-differences tests illustrate that positive (negative) indications of commitment towards the bail-in increased (reduced) the difference in yield between unsecured (i.e., bailinable) and secured (i.e., non-bailinable) bonds. These results are not driven by the generalized banking distress associated with bail-ins. In fact, bonds with different exposures to distress and same bailinable status do not react differently. Consistent with an improvement of market discipline, a triple-differencing framework shows that bail-in increased investors' incentives to incorporate a bank's risk into the prices of its securities.
Citations: 3. Beck, Da-Rocha-Lopes and Silva (2017); Leone, Porretta, Riccetti (2017).
Presentated at: Bank of England (London), Bank of Italy (Rome), CEPR Symposium (London), IFABS (Oxford), ECB (Frankfurt), Cass (London), Cattolica-CONSOB (Milan), ESiBF (London), CSEF (Naples), IRMC (Florence), EFMA (Athens), EFiC (Essex), Wolpertinger (Santander), Petralia (Syracuse), NHH (Bergen), UCL (Louvain), LSM (Lancaster), LUISS (Rome).
Profitability, leverage and competition. How did Norwegian firms react to China’s exports shocks?, 2015 (Coming Soon)
For Fama and French (2002), the established evidence of negative profitability-leverage relation contradicts Trade-Off Theory (TOT). I test TOT under its static and dynamic versions using exogenous expected profitability. Using the “double instrumental variable” approach, the first stage predicts the exogenous competition from China where the instrument is the Chinese exports towards rich countries; the second stage predicts the decrease of Norwegian firms’ profitability that is explained by the increases of exogenous competition from China; the third stage investigates how leverage reacts to the predicted profitability. Concerning the tests of the static TOT, I find that profitability decreases leverage, assets and retained earnings, while debt remains stable. Moreover, tests of the dynamic TOT illustrate a negative profitability-leverage relation at non-refinancing points, which corroborates the dynamic TOT. I also find, at refinancing points, insignificant profitability-leverage relation, which does not corroborate the dynamic TOT.
Presented at: EFMA 2016 Conference (Basel), NHH (Bergen), CSEF (Naples).
The Impact of Capital Purchase Program on the Capital Ratio of U.S. Banks, 2014 (Coming Soon)
This paper illustrates that the U.S. Capital Purchase Program (October 2008) has effectively expanded banks’ capitalization by increasing their equity issues. This impact is analyzed by means of a difference-in-differences framework, after illustrating that the parallel trend assumption is satisfied. In addition, the paper shows that the improvement of banks capitalization has not been attenuated nor reinforced by modifications of the payout or investment policies that may have been resulting from the Capital Purchase Program. These results are robust to the implementation of an instrumental variable approach. In addition, I show that not only the preferred equity, but also the common equity has increased in response to the preferred equity infusions.
Presented at: NHH (Bergen).
"Too-Big-To-Fail: problem solved? A quantitative assessment of the impact of post-crisis reforms", with Jacopo Carmassi (ECB)
This paper contributes to the debate about the magnitude and the dynamics of the too-big-to-fail subsidy for EU banks. The contribution is two-fold. First, it assesses the impact of the reforms started in 2010 (e.g., Basel III reforms, BRRD and SSM), in addition to the effects of the bail-out cases after Lehman Brothers' bankruptcy. Second, this paper studies the funding advantage of large banks by analyzing the total cost of funding, in terms of weighted average cost of capital (WACC). This dimension is important to draw conclusions on the magnitude of the funding subsidy, and to control for the capital structure adjustments, which represent a typical reaction to banking reforms.
"Do unsophisticated debtholders protect banks against bail-ins or resolutions?", with Thorsten Beck (Cass) and Markus Behn (ECB)