Research

Working Papers

Know Your Customer: Informed Trading by Banks (with Rainer Haselmann and Christian Leuz)

Abstract: This study analyzes information production and trading behavior of banks with lending relationships. We combine trade-by-trade supervisory data and credit-registry data to examine banks' proprietary trading in borrower stocks around a large number of corporate events. We find that relationship banks build up positive (negative) trading positions in the two weeks before events with positive (negative) news, even when these events are unscheduled, and unwind positions shortly after the event. This trading pattern is more pronounced when banks are likely to possess private information about their borrowers and cannot be explained by specialized expertise in certain industries or firms. The results suggest that banks' lending relationships inform their trading and underscore the potential for conflicts of interest in universal banking - a prominent concern in the regulatory debate for a long time. Our analysis also illustrates how combining large data sets can enhance the supervision of markets and financial institutions. 

Link to SSRN 

Selected Conferences: NBER Big Data and Securities Markets 2023, EFA 2024

Media Coverage: BFI Research Brief, Harvard Law School Forum on Corporate Governance, ProMarket 

Unintended Consequences of QE: Real Estate Prices and Financial Stability (with Tobias Berg, Rainer Haselmann and Thomas Kick)

Abstract: We investigate how unconventional monetary policy, via central banks' purchases of corporate bonds, unfolds in credit-saturated markets. While this policy results in a loosening of credit market conditions as intended by policymakers, we report two unintended side effects. First, the policy impacts the allocation of credit among industries. Affected banks reallocate loans from investment-grade firms active on bond markets almost entirely to real estate asset managers. Other industries do not obtain more loans, particularly real estate developers and construction firms. We document an increase in real estate prices due to this policy, which fuels real estate overvaluation. Second, more loan write-offs arise from lending to these firms, and banks are not compensated for this risk by higher interest rates. We document a drop in bank profitability and, at the same time, a higher reliance on real estate collateral. Our findings suggest that central banks' quantitative easing has substantial adverse effects in credit-saturated economies.

Link to SSRN 

Selected Conferences: SFS Cavalcade North America 2024, EFA 2024

Media Coverage: Short Presentation at the SUERF-Bocconi-webinar 'The size of central bank balance sheets and financial stability' 

The Value of Private Meetings with Central Bankers (with Rainer Haselmann, Maik Schmeling and Michael Weber)

Abstract: We investigate the ECB’s main informal communication channel, private bilateral meetings of Executive Board members with financial market participants. These meetings are frequent with some institutional investors meeting ECB board members almost every quarter, but they became less frequent after meeting calendars were disclosed publicly and they are subject to a nationality bias. Using trade-level data from Germany, we show banks build up portfolio positions in Euro Area equities after meeting ECB board members and before the ECB announces expansionary monetary policy decisions and report higher trading profits in subsequent quarters. ECB board members' professional experience and educational background, rather than connectedness or capture, appear to drive the results, consistent with an accidental disclosure of private information. Hence, ECB’s informal communication likely indeed conveys meaningful information to the market, but our findings raise concerns about the neutrality and biasedness of the ECB’s communication policy.

Selected Conferences: FIRS 2024, EFA 2024