Job market candidate
Tel. +34 93 542 2699
Available for Interviews at
Simposio de la Asociación Española de Economía (SAEe), December 14-16, Barcelona, Spain
Allied Social Science Associations (ASSA), January 5-7, Philadelphia, US
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Banking, Corporate Finance, Corporate Governance.
"A Model of Bank Credit Cycles", with Tong Xu (Job Market Paper)
This paper develops a model of financial intermediation in which the dynamic interaction between regulator supervision and banks’ loophole innovation generates credit cycles. In the model, banks' leverages are constrained due to a risk-shifting problem. The regulator supervises the banks to ease this moral hazard problem, and its expertise in supervision improves gradually through learning-by-doing. At the same time, banks can engage in loophole innovation to circumvent supervision, which acts as an endogenous opposing force diminishing the value of the regulator's accumulated expertise. In equilibrium, banks' leverage and loophole innovation move together with the regulator's supervision ability. Our model generates pro-cyclical bank leverage and asymmetric credit cycles. We show that a crisis is more likely to occur and the consequences are more severe after a longer boom. In addition, we investigate the welfare implications of a maximum leverage ratio in the environment of loophole innovation.
“Asset Encumbrance and Bank Risk: Theory and Evidence”, with Albert Banal-Estañol, Enrique Benito and Dmitry Kametshin
Asset 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.
“Managerial Career Concerns, Project Choice and Board Expertise"
This paper studies the optimal level of board expertise in a model with managerial career concerns. The manager of a firm chooses between undertaking a risky project or maintaining the status quo. Reputation concerns lead the manager to take on excessively risky projects even if this is against the shareholder’s interest. The board can evaluate the risky project, and cancel it if unfavorable interim news is received. A key result is that firm value is not necessarily enhanced when board expertise in evaluating risky projects improves. On the one hand, with greater expertise, the board is more likely to cancel a bad risky project. On the other hand, board expertise may also exacerbate a manager's career concern problem by over-protecting the manager from the pecuniary losses of risky projects. Our results are consistent with the empirical literature that documents ambiguous effect of board expertise on firm value.
“Loan sales and Bank Moral Hazard”.
This paper re-examines the classical issue of loan sales and banks’ moral hazard by highlighting the role of banks’ bankruptcy risk. In the model, banks finance their loan portfolios by issuing risky debt. Due to limited liability, banks are subject to a risk-shifting problem which leads to the under-provision of screening effort. Banks may sell loans to transfer non-diversifiable credit risk. On the one hand, loan sales reduce banks’ skin in the game, thus diluting their screening incentives. On the other hand, loan sales lower banks’ bankruptcy risk, alleviating the risk-shifting problem. The sign and the magnitude of the effect of loan sales on banks’ moral hazard depend crucially on the relative weights of these two opposing effects. When a bank’s bankruptcy risk is high, the positive risk-shifting reduction effect of loan sales dominates the negative incentive-dilution effect, thus loan sales might curb rather than exacerbate the bank’s moral hazard problem. The results extend to the case in which there is strategic adverse selection of loan sales. We study various extensions of the model.
Research in Progress
"The Rise and Fall of Shadow Banking” (with Tong Xu)
We build a macro-finance model to explain the endogenous rise and fall of the shadow banking sector. In normal times, market discipline on the shadow banks improves because investors accumulate expertise through learning, which leads to an expansion of the shadow banking sector. However, the high leverage associated with better market discipline provides greater incentives for the shadow banks to conduct loophole innovation, which generates systemic risks and leads to the collapse of the shadow banking sector. Our model captures the pro-cyclical size of the shadow banking sector, deteriorating loan quality in boom periods, higher probability of crises after longer booms, and slow recovery following a crises.