| Liquidity Coinsurance in Syndicated Loan Markets
(joint with Filip Zikes and Kevin Kiernan)
|[ Slides ] [ Replication code ]
We characterize the capacity of the bank system to provide credit and liquidity to the corporate sector in times of stress
without government support or inflow of insured deposits. We argue that this capacity depends on the interconnectedness
among banks that results from the process of loan syndication. We document the existence of special interbank credit
lines that total close to $400 billion of mostly undrawn commitments in 2019 and are designed to co-insure liquidity risks
of credit line drawdowns among syndicate banks. We evaluate how the network of interbank exposures, which form a well-defined
core-periphery structure, reallocates liquidity among banks and also provides liquidity insurance to borrowers against
illiquidity of member banks under different liquidity stress scenarios. We show that the introduction of liquidity regulation
has significantly expanded banks' liquidity capacity and has concentrated this liquidity in a few large banks part of the core.
However, unless liquidity requirements are relaxed in stress periods, the accumulated liquidity may not be available and
the liquidity risk-sharing mechanisms that reallocate liquidity from the liquid core to the less liquid periphery banks
may be restricted. Furthermore, we establish that firms with higher reliance on credit lines in their liquidity management
are more likely to obtain credit lines from syndicates with higher liquidity capacity and such assortative matching has increased
with the introduction of liquidity regulation. The COVID-19 pandemic was a test for this liquidity capacity.
Unlike the global financial crisis, we show that banks were unconstrained and able to honor large credit line drawdowns
well within their liquidity capacities and before the introduction of fiscal and monetary stimulus.
| Endogenous Organizational Structure and Internal Allocation of Capital in Banking
(first draft 2014)
(joint with Tszkin Julian Chan
and Ben Craig )
|[ Slides ] [ Replication code ]
We document that large US bank holding companies have organizational
structures composed of a large number of individual subsidiaries with
different geographic or functional specialization. Moreover, and much
less known, the organizational structures across different holding companies
vary in their network characteristics. We combine information from
the organizational structure of bank holding companies with data
from the balance sheets and income statements of the holding company bank
and non-bank subsidiaries to construct a unique dataset of the internal
allocation of funds within a conglomerate. We document that these internal
capital flows are sizeable and increase with the cost of external funding.
Furthermore, banks within a conglomerate with higher centrality in the organizational
network receive disproportionally higher funding controlling for profitability
and investment opportunities. We also show that previous research on the internal
allocation of capital in banking, which did not control for the network structure
and the endogeneity of organizational structure of bank holding companies,
significantly underestimates the role of the internal capital markets.
| In Search of a Risk-Free Asset
(first draft 2012; this revision May 13, 2018, under review)
[ Slides ] [ Replication code ]
[ Appendix ]
To attract time deposits, more than 6,000 banks post their offer rates.
I document a large cross-sectional dispersion, negative spreads over Treasuries,
and upward rigid adjustments in these rates following federal funds rate increases.
Estimates of an oligopoly model reveal a large fraction of high-search-cost and a small declining fraction of
low-search-cost investors that can rationalize the observed pricing.
Despite high intertemporal elasticity of substitution and technological innovations over the last two
decades, the stable large fraction of high-search-cost depositors, mostly elderly households,
grants banks significant monopoly power and allows for the sluggish pass-through of increases in
the federal funds rate into deposit rates.
The Impact of Government Debt on the Convenience Yield of Default-Risk-Free Debt (first draft 2012)
|[ Slides ] [ Replication code ]
A growing empirical literature documents that the quantity of privately held U.S. government debt affects the spreads
on a wide range of fixed-income securities through determining the convenience premium placed on assets with varying
degree of safety and liquidity. Shocks to the convenience premium, therefore, constitute an important source of disturbance
to banks' relative cost of funds across insured and non-insured deposits. To the extent that one questions the validity of
the aggregate correlations found in the literature, the liability side of FDIC insured commercial banks provides a unique
laboratory for testing the impact of the public supply of safe and liquid assets on determining asset prices and allocations.
Using a proprietary micro-level dataset of prices and quantities of insured and non-insured liabilities of the U.S. commercial banks,
I document the heterogeneous response of banks with different capital structure in the pricing and funding choices across the two
types of debt to changes in the level and maturity of government debt. The latter have larger impact on banks that have higher share
of insured sources of funding. Overall, an increase in the level of government debt and shortening of its maturity have
a contractionary effect on the banks' balance sheets pointing to a strong crowding out effect of government debt on the banking system
capacity to attract cheap sources of funding in the form of deposits and hence its ability to extend loans.
| Limited Deposit Insurance Coverage and Bank Competition
(first draft 2014)
[ Slides ]
(joint with Oz Shy and Rune Stenbacka )
Journal of Banking and Finance,
Volume 71, October 2016, Pages 95-108
Deposit insurance schemes in many countries place a limit on the coverage of deposits in each bank.
However, no limits are placed on the number of accounts held with different banks. Therefore, under
limited deposit insurance, some consumers open accounts with different banks. We compare three regimes
of deposit insurance: No deposit insurance, unlimited deposit insurance, and limited deposit insurance.
We show that limited deposit insurance weakens competition among banks and reduces consumer welfare as
well as total welfare relative to no or unlimited deposit insurance.
| Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets
(joint with Simon Gilchrist and
Journal of Monetary Economics,
Elsevier, vol. 56(4), pages 471-493, May 2009.
In the Press: Wall Street Journal .
To identify disruptions in credit markets, research on the role of
asset prices in economic fluctuations has focused on the information
content of various corporate credit spreads. We re-examine this
evidence using a broad array of credit spreads constructed directly
from the secondary bond prices on outstanding senior unsecured debt
issued by a large panel of nonfinancial firms. An advantage of our
``ground-up'' approach is that we are able to construct matched
portfolios of equity returns, which allows us to examine the
information content of bond spreads that is orthogonal to the
information contained in stock prices of the same set of firms, as
well as in macroeconomic variables measuring economic activity,
inflation, interest rates, and other financial indicators. Our
portfolio-based bond spreads contain substantial predictive power
for economic activity and outperform - especially at longer
horizons - standard default-risk indicators. Much of the predictive
power of bond spreads for economic activity is embedded in
securities issued by intermediate-risk rather than high-risk
firms. According to impulse responses from a structural
factor-augmented vector autoregression, unexpected increases in bond
spreads cause large and persistent contractions in economic
activity. Indeed, shocks emanating from the corporate bond market
account for more than 30 percent of the forecast error variance in
economic activity at the two-to four-year horizon. Overall, our
results imply that credit market shocks have contributed
significantly to U.S. economic fluctuations during the 1990--2008
| Essays on Banking, Finance and Macroeconomics, Ph.D Dissertation 2013, Boston University
| Rewiring repo
(joint with Jin-Wook Chang,
Elizabeth Klee, and Erik Larsson)
We study the structure and efficiency of the repurchase agreement (repo) market in allocating cash and collateral across two segments.
The first segment is a decentralized tri-party repo market characterized by established and persistent long-term relationships between
dealers (borrowers) and cash lenders. The second segment is a centrally-cleared interdealer market that reallocates excess cash borrowed
in the decentralized market to dealers with cash deficits. We develop a model of a networked repo market with strategic interactions among
dealers who compete for funding from a limited pool of cash allocated across different lenders. The model allows us to disentangle supply
and demand factors that determine the clearing of excess demand for cash in the centralized market. We estimate the supply and demand factors
along with the supply and demand elasticities for cash and collateral. We determine conditions under which the market could become unstable as
a result of competition among dealers and capacity constraints of lenders. Our results are important in designing efficient market interventions
to stabilize the market as well as in understanding how monetary policy tools such as the ON RRP facility affect the market.
| Collateral Valuations and Credit Allocations
(joint with Arun Gupta and Horacio Sapriza)
We study the role of real estate collateral valuations for bank credit to bank-dependent borrowers. We contribute to the empirical literature
on the collateral channel of corporate investment in several ways. First, we estimate the sensitivity of loan growth rates to CRE price
fluctuations, controlling for firm-, market-, and bank-level characteristics. We exploit the firm-bank-market structure of the data to identify
bank-level credit supply and firm-level credit demand factors and use those factors as controls when estimating collateral value sensitivities.
Second, we document that CRE collateral use is mostly concentrated in small bank-dependent borrowers and in markets with high real estate supply
elasticities. We estimate that every 10-percentage point increase in CRE collateral valuations contributes to about 28 basis point annual increase
in bank lending to firms that pledge CRE collateral. Third, we study how banks respond to differentials in asset valuations across MSA areas through
internal capital market allocations. We estimate that a multi-market bank responds to a 10-percentage point difference between two MSA areas
by increasing credit allocations to the higher valuation market by about 80 basis points on an annual basis. Our identified micro-level elasticities
could be aggregated to examine the general equilibrium effects of the collateral channel as well as feedback loops between credit allocations and
| Liquidity Regulation and Corporate Liquidity Management