In for a Penny, in for a Pound? Evergreening and Monetary Tightening
[Draft available upon request]
This paper documents that monetary tightening induces evergreening behavior in the corporate loan market. Following contractionary monetary shocks, banks cut credit supply to firms with existing credit relationships - but less so to firms close to default, enabling these firms to roll over more maturing loans at lower interest rates. Exploiting cross-bank variation in estimates of the probability of default for the same firm within a quarter, I isolate a credit supply channel that shields risky firms from monetary tightening, reducing their financing gap by up to 30%. My findings imply a weaker transmission of monetary tightening to risky firms with rollover needs at the expense of potential long-term risks to financial stability.
Army of Mortgagors: Long-Run Evidence on Credit Externalities and the Housing Market (with Moritz Kuhn and Farzad Saidi)
[Opportunity & Inclusive Growth Institute at the Minneapolis FED Working Paper] [Latest version on Farzad's website]
The U.S. economy is sensitive to house price fluctuations. Existing research focuses mainly on the 2000s and argues that credit conditions are at the core of these fluctuations. This conclusion, however, requires disentangling credit supply from altered house price expectations. We achieve this by relying on novel microdata covering mortgages guaranteed under the Veterans Administration (VA) loan program since the 1980s. We use the expansion of eligibility for the program following the Gulf War to estimate a long-lived effect of credit supply on house prices. We then exploit the segmentation of the conventional mortgage market from program eligibility to link this sustained house price growth to developments in the initially unaffected segment of the mortgage market. We uncover a net increase in credit for other mortgage applicants that aligns closely with the evolution of house price growth, supporting the view that credit-induced house price shocks are amplified by changing expectations.
The Impact of Monetary Policy and Macroprudential Policy on Corporate Lending Rates in the Euro Area (joint with Jan-Hannes Lang and Marek Rusnák)
We examine the differential impact of monetary policy and macroprudential policy on bank lending rates in the euro area, using granular corporate loan-level data for the period 2019-2023. We find three results: First, consistent with the predictions of a stylized theoretical model of bank lending rates, monetary policy exerts an order of magnitude larger impact on lending rates than macroprudential policy. Second, the effectiveness of monetary policy transmission weakens when interest rates are close to or below zero. Third, the impact of macroprudential policy on lending rates increases when banks have limited capital headroom above capital buffer requirements, indicating cautious lending behavior when banks get close to regulatory constraints. Our findings have important policy implications for the joint conduct of monetary and macroprudential policy.