Welcome to my personal homepage!
In 2013, I graduated with a Ph.D. in Economics from the London School of Economics and Political Science, where I was a Deutsche Bank Fellow at the Financial Markets Group. In Spring 2012, I visited the Department of Economics at New York University.
In September 2013, I joined the Bank of Canada as a research economist in the Financial Studies Division, where I was promoted to Principal Researcher in September 2016 and to Research Advisor in September 2018.
I am a member of the Finance Theory Group, a Research Affiliate at CEPR (Financial Economics), and a Research Associate at LSE's Systemic Risk Centre. Here is my page on Google Scholar.
- Global Games and Financial Intermediation
- Asset Encumbrance, Bank Funding and Fragility (with Kartik Anand, Prasanna Gai, James Chapman)
Review of Financial Studies, 32 (6), June 2019, Pages 2422–2455(Previous versions published as Systemic Risk Centre DP 83, European Systemic Risk Board WP 52, and Bank of Canada WP 2016-16)
We model asset encumbrance by banks subject to rollover risk and study the consequences for fragility, funding costs, and prudential regulation. A bank's privately optimal encumbrance choice balances the benefit of expanding profitable yet illiquid investment, funded by cheap long-term senior secured debt, against the cost of greater fragility from runs on unsecured debt. We derive testable implications about encumbrance ratios. The introduction of deposit insurance or wholesale funding guarantees induces excessive encumbrance and fragility. Ex-ante limits on asset encumbrance or ex-post Pigovian taxes eliminate such risk-shifting incentives. Our results shed light on prudential policies currently pursued in several jurisdictions.
- Information Contagion and Systemic Risk (with Co-Pierre Georg)
We examine the effect of ex-post information contagion on the ex-ante level of systemic risk defined as the probability of joint default of banks. Because of counterparty risk or common exposures, bad news about one bank reveals valuable information about another bank and trigger information contagion. When banks are subject to common exposures, information contagion induces small adjustments to bank portfolios and therefore increases systemic risk overall. When banks are subject to counterparty risk, by contrast, information contagion induces a large shift toward more prudential portfolios and therefore reduces systemic risk.Journal of Financial Stability, 35, April 2018, Pages 159-71(Also published as Bank of Canada WP 2017-29)
- Information choice and amplification of financial crises (with Ali Kakhbod)
We propose an amplification mechanism of financial crises based on the information choice of investors. Information acquisition always makes investors more likely to act against what is suggested by the prior. Deteriorating public news under an initially strong (weak) prior increases (reduces) the value of private information and induces more (less) information acquisition. Deteriorating public news always increases the probability of a crisis, since the initially strong (weak) prior suggests do-not-attack (attack). This effect is amplified when information choices are endogenous. To enhance financial stability, a policymaker can use taxes and subsidies to affect information acquisition. We also derive implications about the magnitude of amplification and discuss how these can be tested.Review of Financial Studies, 30 (6), June 2017, Pages 2130-78(Previous version published as Bank of Canada WP 2014-30)
- Rollover Risk, Liquidity and Macroprudential Regulation
I study rollover risk in wholesale funding markets when intermediaries hold liquidity ex ante and fire sales may occur ex post. Multiple equilibria exist in a global rollover game: intermediate liquidity holdings support equilibria with both positive and zero expected liquidation. A simple uniqueness refinement pins down the private liquidity choice, which balances the forgone expected return on investment with reduced fragility and costly liquidation. Due to fire sales, liquidity holdings are strategic substitutes. Intermediaries free ride on the holdings of other intermediaries, causing excessive liquidation. To internalize the systemic nature of liquidity, a macroprudential authority imposes liquidity buffers.Journal of Money, Credit and Banking, 48 (8), December 2016, Pages 1753-85.(Previous versions published as European Central Bank WP 1667 and Bank of Canada WP 2014-23)
- A wake-up call theory of contagion (with Christoph Bertsch)
We offer a theory of contagion based on the information choice of investors after observing a financial crisis elsewhere. We study global coordination games of regime change in two regions with an unobserved common macro shock as the only link between regions. A crisis in the first region is a wake-up call to investors in the second region. It induces them to reassess the regional fundamental and acquire information about the macro shock. Contagion can even occur after investors learn that regions are unrelated (zero macro shock). Our results rationalize empirical evidence about contagious bank runs and currency crises after wake-up calls. We also derive new implications and discuss how these can be tested.Revise & Resubmit
- Should bank capital regulation be risk sensitive? (with James Chapman, Carolyn Wilkins)
We present a simple model of the risk sensitivity of bank capital regulation. A banker funds a project with uninsured deposits and costly capital, where capital resolves a moral hazard problem in the choice of the probability of default (PD). Investors are uninformed about the project's high or low loss given default (LGD) but a regulator receives a noisy signal and imposes minimum capital requirements. We show that the sensitivity of capital regulation to measured risk is non-monotonic. For an inaccurate signal, the regulator pools banker types via risk-insensitive capital requirements. For an accurate signal, the regulator separates types via risk-sensitive capital requirements. For an even more accurate signal, the risk sensitivity of bank capital requirements falls.Revise & Resubmit (2nd round)
- Loan Insurance, Market Liquidity, and Lending Standards (with Martin Kuncl)
We examine insurance against loan default when lenders can screen in primary markets at a heterogeneous cost and learn loan quality over time. In equilibrium, low-cost lenders screen loans but some high-cost lenders insure them. Insured loans are risk-free and liquid in a secondary market, while uninsured loans are subject to adverse selection. Loan insurance reduces the amount of lemons traded in the secondary market for uninsured loans, improves liquidity, and lowers lending standards. This pecuniary externality implies insufficient loan insurance in the liquid equilibrium. Therefore, a regulator achieves constrained efficiency by imposing a Pigouvian subsidy on loan insurance.
- Macroprudential FX Regulations: Shifting the Snowbanks of FX Vulnerability?
(with Kristin Forbes, Christian Friedrich, Dennis Reinhardt)
Can macroprudential foreign exchange (FX) regulations on banks reduce the financial and macroeconomic vulnerabilities created by borrowing in foreign currency? To evaluate the effectiveness and unintended consequences of macroprudential FX regulations, we develop a parsimonious model of bank and market lending in domestic and foreign currency and derive four predictions. We confirm these predictions using a rich dataset of macroprudential FX regulations. These empirical tests show that FX regulations: (1) are effective in terms of reducing borrowing in foreign currency by banks; (2) have the unintended consequence of simultaneously causing firms to increase FX debt issuance; (3) reduce the sensitivity of banks to exchange rate movements, but (4) are less effective at reducing the sensitivity of corporates and the broader financial market to exchange rate movements. As a result, FX regulations on banks appear to be successful in mitigating the vulnerability of banks to exchange rate movements and the global financial cycle, but partially shift the snowbank of FX vulnerability to other sectors.
- Seeking Safety: A Theory of Demandable Debt (with Enrico Perotti)
The scale of safe assets suggests a structural demand for a safe wealth share beyond transaction and liquidity roles. We study how investors achieve a reference wealth level by combining self-insurance and contingent liquidation of investment. Intermediaries improve upon autarky, insuring investors with poor self-insurance and limiting liquidation. Delegation creates a conflict in states with residual risk, however. Demandable debt ensures safety-seeking investors can withdraw to implement a safe outcome. The introduction of deposit insurance boosts bank debt volume and can increase investment. We conclude that the public provision of safety can crowd in the private provision of safety.
- Cheap but Flighty (with Enrico Perotti)
A wealth shift to emerging countries may lead to instability in developed countries. Investors from emerging countries exposed to expropriation risk are willing to pay a safety premium to invest in countries with good property rights. Intermediaries compete for such cheap funding by carving out absolutely safe claims, which requires demandable debt. While these safety-seeking inflows allow developed countries to expand credit, risk-intolerant foreign investors withdraw even under minimal uncertainty. More foreign funding causes larger and more frequent runs. As excess liquidation causes social losses, a domestic planner may seek prudential measures on the scale of foreign inflows.
Work in progress
- Bank Competition, Bank Runs and Opacity (with David Martinez-Miera)
- Rollover Risk, Bank Borrowing and Fragility (with Kartik Anand, Philipp König)
- Anticipated Financial Contagion (with Co-Pierre Georg, Gideon DuRand)
- Trading for Bailouts (with Caio Machado, Ana Elisa Pereira)
- Portfolio Choice, Bank Runs and Liquidity Provision (with Mahmoud Elamin)
We study the portfolio choice of banks in a micro-founded model of runs. To insure risk-averse investors against liquidity risk, competitive banks offer demand deposits. We use global games to link the run probability to bank portfolios. Upon interim information about risky investment, banks liquidate investment to hold a safe asset. This partial hedge against investment risk reduces the withdrawal incentives of investors for a given deposit rate. Thus, banks can provide more liquidity to investors and welfare increases. Our results highlight the two-way feedback between the risks on a bank's asset side and liability side.
- Transparency in Global Games of Regime Change (with Christoph Bertsch, Daniel Quigley, Frederik Toscani)