1) The Effect of Central Bank Liquidity Injections on Bank Credit Supply
Co-authored with Luisa Carpinelli, March 2017
Paper · Online Appendix · Slides · BibTeX
AFA 2017, RFS BSRMM 2017
Young Economist Award, ECB Forum on Central Banking
Edwin Elton Prize for the Best Finance JMP at NYU Stern
Media Mentions: Wall Street Journal
Abstract: We study the effectiveness of central bank liquidity injections in restoring bank credit supply following a wholesale funding dry-up. We combine the Italian credit registry with bank security-level holdings and analyze the transmission of the European Central Bank 3-year Long Term Refinancing Operation. Exploiting a regulatory change that expands the pool of eligible collateral, we show that banks more affected by the dry-up use the central bank liquidity to restore credit supply, while less affected banks to increase their holdings of high-yield government bonds. Unable to completely switch from affected banks during the dry-up, firms benefit from the intervention.
2) The (Unintended?) Consequences of the Largest Liquidity Injection Ever
Co-authored with Miguel Faria-e-Castro and Luìs Fonseca, April 2017
Paper · Online Appendix · BibTeX
AFA 2016, SED 2016, CFIC 2017
3rd SUERF/Unicredit & Universities Foundation Research Prize, 2015
Media Mentions: Wall Street Journal, Frankfurter Allgemeine
Abstract: We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks. Using a unique security-level dataset, we find that the European Central Bank’s three-year Long-Term Refinancing Operation incentivized Portuguese banks to purchase short-term domestic government bonds that could be pledged to obtain central bank liquidity. This “collateral trade” effect is large, as banks purchased short-term bonds equivalent to 8.4% of amounts outstanding. The steepening yield curve and the resumption of public debt issuance are consistent with the equilibrium effects of the collateral trade.
3) Why Are Banks Not Recapitalized During Crises?
Being revised for resubmission at the Journal of Financial Economics
Paper · BibTeX
EFA 2016, OxFIT 2016, Barcelona Summer Forum 2015
Eleventh Klaus Liebscher Award, 2015
Ieke van den Burg Prize for Research on Systemic Risk, Shortlisted, 2016
Abstract: I develop a model where the sovereign debt capacity depends on the capitalization of domestic banks. Low-capital banks optimally tilt their government bond portfolio toward domestic securities, linking their destiny to that of the sovereign. If the sovereign risk is sufficiently high, low-capital banks reduce private lending to further increase their holdings of domestic government bonds, lowering sovereign yields and supporting the home sovereign debt capacity. The model rationalizes, in the context of the eurozone periphery, the increase in domestic government bond holdings, the reduction of bank credit supply, and the prolonged fragility of the financial sector.
4) The Anatomy of the Transmission of Macroprudential Policies: Evidence from Ireland
Co-authored with Viral Acharya, Katharina Bergant, Tim Eisert, and Fergal McCann, September 2017
Abstract: We provide a comprehensive analysis of the transmission of macroprudential policies aimed at limiting bank risk-taking in residential real estate. Combining supervisory loan- and security-level data, we examine the effect of loan-to-income and loan-to-value limits on residential mortgages issued by Irish banks after February 2015 on household access to credit and bank risk-taking. We find that, in response to the macroprudential policy, banks increase their risk-taking in both corporate credit and holdings of securities and reduce the rate charged to high-income households who lever up buying expensive properties.