The (Unintended?) Consequences of the Largest Liquidity Injection Ever
Journal of Monetary Economics, 112, 97-112, June 2020
Co-authors: Miguel Faria-e-Castro and Luìs Fonseca
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The Design and Transmission of Central Bank Liquidity Provisions
Being revised for resubmission at the Journal of Financial Economics
Co-authored with Luisa Carpinelli
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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 show how the design of central bank provisions of collateralized liquidity to banks following a wholesale funding dry-up affects their transmission. Combining Italian banks’ security-level holdings with the national credit register, we analyze the role of maturity and collateral during the ECB’s three-year Long-Term Refinancing Operations. We find that (i) long-term liquidity helped banks hit by the dry-up support their credit supply to firms; (ii) a government guarantee, by allowing these banks to expand their eligible collateral, was necessary for the transmission to firms; and (iii) banks used most liquidity to buy government bonds.
Why Are Banks Not Recapitalized During Crises?
Being revised for resubmission (2nd round) at the Journal of Financial Economics
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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.
The Anatomy of the Transmission of Macroprudential Policies
Co-authors: V. Acharya, K. Bergant, T. Eisert, F. McCann, April 2020
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FIRS 2018, LSE PWC, NBER SI (CF), EFA 2019, WFA-CFAR 2019, AFA 2020
Abstract: We analyze how regulatory constraints on household leverage—in the form of loan-to-income and loan-to-value limits—affect residential mortgage credit and house prices as well as other asset classes not directly targeted by the limits. Supervisory loan level data suggest that mortgage credit is reallocated from low- to high-income borrowers and from urban to rural counties. This reallocation weakens the feedback loop between credit and house prices and slows down house price growth in “hot” housing markets. Consistent with constrained lenders adjusting their portfolio choice, more-affected banks drive this reallocation and substitute their risk-taking into holdings of securities and corporate credit.
Zombie Credit and (Dis-)Inflation: Evidence from Europe
Co-authors: V. Acharya, T. Eisert, C. Eufinger, June 2020
Paper · BibTeX · VoxEU · FT
FRBNY/NYU FI 2019, MonPolicy & Reality, FIRS 2020, Cavalcade 2020, WFA 2020, AFA 2021
Abstract: We show that cheap credit to impaired firms has a disinflationary effect. By helping distressed firms to stay afloat, “zombie credit” creates excess production capacity reducing, in turn, prices and markups. Granular European inflation and firm-level data confirms this mechanism. At the industry-country level, a rise of zombie credit is associated with a decrease in product prices, markups, firm default, entry, and productivity, and an increase in input costs and sales. Without a rise in zombie credit, inflation in Europe would have been 0.4 percentage points higher post-2012. We also document adverse spillover effects from zombie to healthy firms.
Pirates without Borders: the Propagation of Cyberattacks through Firms’ Supply Chains · with Marco Macchiavelli, Andre Silva, July 2020
Abstract: This paper examines the effects of the most damaging cyberattack in history on firms’ supply chains and the role of banks in mitigating its impact. We find a significant downstream propagation of the shock to customers of directly hit firms. Specifically, these affected customers saw reductions in revenues, profitability, and trade credit provided by suppliers relative to similar firms. To cope with the losses, affected customers utilized their internal liquidity buffers and increased borrowing, drawing down their credit lines at banks while paying higher interest rates due to increased risk. The profit losses were larger for customers with fewer alternative suppliers, highlighting the role of supply chain vulnerabilities. We also document how supply chain networks evolved in response to the shock.
Monetary Policy and Export-Dependent Growth in the Euro Area: Curse or Blessing?Co-authors: T. Eisert, T. Marchuk