“Loan Screening When Banks Have Superior Information Technology” (with Kenichi Ueda)
We analyze the loan market where the project quality is unknown to both a bank and a firm, but it is revealed with noise to the bank with cost. We show that either a separating equilibrium or a pooling equilibrium emerges. In the separating equilibrium, banks conduct costly screening and lend to only high-quality firms. In the pooling equilibrium, banks make no screening effort and lend indiscriminately. Separating equilibrium emerges when the average project quality is low, or when the international interest rate is high. The improvement of the screening technology increases welfare by decreasing screening cost. However, the government subsidies such as interest rate subsidy and public loan guarantees generate welfare loss by discouraging banks from engaging in screening efforts.
“Equilibrium Excess Reserves During Banking Crisis” (with Kenichi Ueda)
Equilibrium bank runs depend on the endogenous bank queuing uncertainties. Under the settings of physical liquidation of long-term assets, different bank queuing conditions can lead to no run and all run pure strategy Nash equilibria in the post deposit game. In the pre-deposit game, based on the public lottery of bank queuing, there are two lottery equilibria: (i) When the propensity of run is low, banks hold limited reserves, and both no run and all run equilibria appear in the post deposit game. (ii) When the propensity of run is high, banks hold excess reserves, and only no run equilibrium appears in the post deposit game. With the introduction of inter-bank LBS transactions, there are no run, partial run, and all run pure strategy Nash equilibria in the post deposit game. In the pre-deposit game, lottery equilibria exist only under a certain type of public lotteries.
“Green Bond Pricing And Greenwashing Under Asymmetric Information” (with Jochen Schmittmann, IMF Working Paper WP/22/246)
The green bond market is growing rapidly, but the theoretical foundations of the market remain poorly understood. This paper proposes a simple adverse selection model in which information asymmetry regarding firms’ emissions exists between bond issuers and bond buyers. Green bonds can provide a signal of firms’ green credentials, but the value of the signal is dependent on several factors. Transition risk in the model stems from uncertainty over the introduction of carbon taxation. The model can explain the pricing of green bonds relative to conventional bonds and the extent of greenwashing in the market as a function of transition risk, the cost of issuing green bonds, and the costs associated with engaging in greenwashing. The simple model provides a rich set of policy implications, notably the need for a quick introduction of carbon taxation and strong information disclosures and regulations to ensure the integrity of green bonds.