Excess Reserves and Monetary Policy Tightening (with Daniel Fricke and Karol Paludkiewicz)
Review of Finance, forthcoming
We show that large excess reserves affect monetary policy transmission. Specifically, the net worth of reserve-rich banks may increase when the interest rate paid on excess reserves increases strongly. Focusing on the European Central Bank's 2022 rate hiking cycle, we show that banks with larger excess reserves display a relative increase in their credit supply to non-financial companies following the rate hike. The effect is stronger for smaller banks and for banks with lower equity ratios and mainly directed towards smaller firms and firms with higher credit quality.
Press Coverage: Börsenzeitung, El Confidential, Financial Times, Platow Brief, VoxEU, SUERF Policy Brief, Central Banking
Collateral Scarcity and Market Functioning: Insights From the Eurosystem Securities Lending Facilities (with Stephan Jank)
Review of Finance, forthcoming
We utilize the Eurosystem securities lending facilities as a laboratory to investigate the impact of collateral scarcity on market functioning. The reduction of securities lending fees, implemented in November 2020, provides a natural experiment for our analyses. This policy change results in a surge in the utilization of securities lending facilities, particularly for bonds with limited supply elasticity in the repo market. We find no evidence of substitution effects; instead, the overall activity in the repo market expands through the collateral multiplier. The improved pricing conditions alleviate collateral scarcity and enhance market quality in both the repo and cash markets.
You Can't Always Get What You Want (Where You Want It): Cross-Border Effects of the US Money Market Fund Reform (with Daniel Fricke and Karol Paludkiewicz)
Journal of International Economics, 2024
This paper documents significant cross-border effects of the 2014 US money market fund (MMF) reform on euro area MMFs. As US-based prime funds became less money-like due to the reform, euro area-based prime funds received large inflows from foreign investors. These cross-border flows were motivated by the search for stable NAV instruments. Consistent with an easing of competitive pressure, euro area prime MMFs reduced their risk-taking. Lastly, the EU MMF regulation, a weaker regulatory intervention compared to the US reform, did not lead to a reversal of the documented cross-border flows.
On the importance of fiscal space: Evidence from short sellers during the COVID-19 pandemic (with Stephan Jank and Esad Smajlbegovic)
Journal of Banking & Finance, 2023
Using the exogenous shock of the COVID-19 pandemic, we study how informed market participants incorporate fiscal space into their trading decisions. At the onset of the pandemic, short-selling activity shifted towards companies with low financial flexibility but only in countries with limited fiscal space. Among such companies, short sellers specifically targeted those that generate their revenues mainly in the domestic market. These short sellers entered their positions before the market crash, thereby generating significant abnormal returns. We find no evidence of either herding behavior prior to the market crash or a long-run performance reversal of short sellers. These findings support the notion that short sellers help to promote price efficiency in times of crisis, where governments with budgetary constraints are unable to provide sufficient stimuli to their economies.
Small is beautiful? How the introduction of mini futures contracts affects the regular contracts (with Erik Theissen)
Journal of Empirical Finance, 2022
Using panel data covering 27 years and more than 20 contracts, we analyze how the introduction of mini futures contracts affects the liquidity of the regular contracts. The liquidity of the regular contracts increases and the volatility decreases while the trading volume does not change significantly. Further analysis reveals that only those regular contracts that are traded electronically benefit from the introduction of a mini contract. Our results imply that increased fragmentation is not necessarily harmful to market quality and they reveal a preference of traders for electronic trading protocols.