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Simposio de la Asociación Española de Economía (SAEe), December 14-16, Barcelona, Spain
Allied Social Science Associations (ASSA), January 5-7, Philadelphia, US
Financial Intermediation, Financial Markets, Corporate Finance, International Finance.
"Central Bank Liquidity Provision and Segmentation of Collateral Markets" (Job Market Paper)
Collateral frameworks operated by central banks are at the core of financial stability and monetary policy implementation. As the lender of last resort, a central bank protects itself from excessive credit risk with eligible collateral. However, the acceptability of assets in refinancing operations can distort asset pricing and concentrate liquidity-constrained banks in the segment of pledgeable debts. The empirical analysis of these effects is hampered by difficulties in identification: shifts in collateral frameworks usually coincide with changes in the credit risks of the debt issuers. In this paper, I address these challenges and trace the outcomes of the collateral policy amendment that took place in Russia in 2015. For identification, I build a novel dataset on Russian municipal credit markets and exploit the particularities of the institutional setup where multiple potential lenders compete for the same credit contracts in English auctions. In a difference-in-difference setting, I document the pricing effect of the collateral framework: as long as their liabilities are pledgeable under the updated refinancing program, the borrowers earn, on average, an interest rate discount of 0.8pp. I then analyze a simple mechanism of bank competition that drives the price differential. I first show that in the auctions allocating collateralizable contracts, it is liquidity-constrained banks who offer lower interest. I also demonstrate that short-in-liquidity banks affect pricing indirectly by competing more frequently for eligible assets. As a consequence, financially weak institutions win competition more often when they compete for collateralizable debts. The effects are robust to a wide range of tests, including a control for unobservable heterogeneity at the level of a loan contract. These results suggest that, by changing the network of borrower-lender relationships, collateral frameworks affect the pricing of eligible assets and bank concentration risks.
“Hedger of Last Resort: Evidence from Brazil on FX Interventions, Local Credit and Global Financial Cycles” (joint with Rodrigo Gonzalez Barbone, José-Luis Peydró, Andrea Polo)
We analyze whether changes in global financial conditions affect local credit and the real economy in emerging markets and whether local central banks can attenuate such spillovers. For identification, we exploit macro shocks and three matched administrative registers in Brazil: a register of foreign credit flows to Brazilian commercial banks, a credit register from the Central Bank of Brazil, and a matched employer-employee dataset from the Ministry of Labor and Employment. We show that after the announcement of US Quantitative Easing tapering by Ben Bernanke in May 2013, which was associated with massive depreciation and increased volatility of the local currency, domestic commercial banks with larger foreign liabilities reduced the supply of credit to firms and this had real effects in terms of formal employment. However, these negative effects were attenuated in the following months when the Central Bank of Brazil announced a massive intervention program to provide liquidity in the FX derivatives’ market, i.e. insurance against exchange rate risks (hedger-of-last-resort). On top of these two subsequent shocks, we also analyze a full panel dataset from 2008 to 2015 and identify a broader channel: banks with larger FX liabilities reduce their supply of credit after episodes of US Dollar appreciation. Moreover, these effects are partially mitigated in the two years after the intervention of the central bank confirming that this hedger-of-last-resort policy has been effective in decreasing local economy exposure to global financial conditions.
Asset Encumbrance and Bank Risk: Theory and Evidence” (with Albert Banal-Estañol, Enrique Benito, and Jianxing Wei)
We analyzeAsset encumbrance refers to the existence of bank balance sheet assets being subject to arrangements that restrict the bank’s ability to freely transfer or realize them. Asset encumbrance has recently become a much-discussed subject and policymakers have been actively addressing what some consider to be excessive levels of encumbrance. Despite its importance, the phenomenon remains poorly understood. We provide a simple theoretical model that highlights the implications of asset encumbrance for financial stability. We show that the effect of encumbrance depends on rates of over-collateralization faced by the banks. With low haircuts, asset encumbrance is negatively associated with bank credit risks as secured funding minimizes bank's exposure to liquidity shocks. With high haircuts, encumbrance can exacerbate liquidity risks due to structural subordination effect and, hence, can be positively associated with bank credit risk premiums. We next use a hand-collected dataset on the levels of asset encumbrance of European banks and provide further empirical evidence supporting the predictions of the model. Our empirical results point to the existence of a negative association between CDS premia and asset encumbrance. Still, certain bank-level variables play a mediating role in this relationship. For banks that have high exposures to the central bank, high leverage ratio, or are located in southern Europe, asset encumbrance is less beneficial and could even be detrimental in absolute terms.
“Asset Encumbrance and CDS Premia of European Banks: Do Capital and Liquidity Tell the Whole Story?”, Enrique Benito, Albert Estañol-Banal, Dmitry Khametshin.
Forthcoming in "Finance and Investment: The European Case" edited by C. Mayer, et al., Oxford, UK: Oxford University Press, 2018