1) The Effect of Central Bank Liquidity Injections on Bank Credit Supply
Co-authored with Luisa Carpinelli, January 2018
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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 analyze central bank provisions of collateralized liquidity to banks following a wholesale funding dry-up. Combining rm-level data from the Italian loan credit registry with supervisory data on security-level holdings, we examine the European Central Bank’s three-year Long Term Refinancing Operations. We find that (i) long-term, but not short-term, central bank liquidity helped banks hit by the dry-up restore their credit supply to firms; (ii) banks used most liquidity to buy government bonds; and (iii) a government guarantee, by granting banks hit by the dry-up access to central bank liquidity, was necessary for the transmission of liquidity to firms.
2) The (Unintended?) Consequences of the Largest Liquidity Injection Ever
Co-authored with Miguel Faria-e-Castro and Luìs Fonseca, November 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 data set, we find that the European Central Bank’s three-year Long-Term Refinancing Operation caused Portuguese banks to purchase short-term domestic government bonds and pledge them to obtain central bank liquidity. This “collateral trade” effect is large, as banks purchased short-term bonds equivalent to 10.6% of amounts outstanding. The steepening of peripheral sovereign yield curves after the policy announcement is consistent with the equilibrium effects of the collateral trade.
Being revised for resubmission 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.
4) The Anatomy of the Transmission of Macroprudential Policies: Evidence from Ireland
Co-authors: V. Acharya, K. Bergant, T. Eisert, F. McCann, January 2018
RFS BSRMM 2018
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, bank risk-taking, and real estate prices. We find that, in response to the macroprudential policy, low income households borrow less and banks reduce the rate charged to high income households who lever up taking out larger loans. The resulting credit reallocation is effective in slowing down the ongoing house price appreciation and causes banks to increase their risk-taking in both corporate credit and holdings of securities.