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 and my [CV].

Research:

Research interests

• Financial Intermediation, Global Games, International Finance

Publications

• Should bank capital regulation be risk sensitive? (with James Chapman, Carolyn Wilkins) [Abstract] [Paper]

  
  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.

  Journal of Financial Intermediation, accepted


• Macroprudential FX Regulations: Shifting the Snowbanks of FX Vulnerability? (with Kristin Forbes, Christian Friedrich, Dennis Reinhardt) [Abstract] [Paper]

  
  We use a new dataset on macroprudential FX regulations to evaluate their effectiveness and unintended consequences. Our results support the predictions of a model in which banks and markets lend in different currencies, but only banks can screen firm productivity. Regulations significantly reduce bank FX borrowing, but firms respond by increasing FX debt issuance. Moreover, regulations reduce bank sensitivity to exchange rates, but are less effective at reducing the sensitivity of the broader economy. Therefore, FX regulations on banks mitigate bank vulnerability to currency fluctuations and the global financial cycle, but appear to partially shift the snowbanks of vulnerability elsewhere.

  Journal of Financial Economics, accepted


• Bank Runs, Portfolio Choice and Liquidity Provision (with Mahmoud Elamin) [Abstract] [Paper]

  
  We examine 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 probability of a run to the bank's portfolio management. Based upon interim information about risky investment, banks liquidate investments to hold a safe asset. This partial hedge against investment risk reduces the withdrawal incentives of investors for a given deposit rate. As a result, (i) banks provide more liquidity ex ante (so banks offer a higher deposit rate) and (ii) the welfare of investors increases. Our results highlight the management of both sides of a bank's balance sheet and a complementarity in the two forms of insurance that banks provide to investors.

  Journal of Financial Stability, 50, October 2020


• Asset Encumbrance, Bank Funding and Fragility (with Kartik Anand, Prasanna Gai, James Chapman) [Abstract] [Paper]
  Review of Financial Studies, 32 (6), June 2019, Pages 2422-55
  (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) [Abstract] [Paper]

  
  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) [Abstract] [Paper]

  
  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 [Abstract] [Paper]

  
  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)

Completed and active papers

• Loan Insurance, Market Liquidity and Lending Standards (with Martin Kuncl) [Abstract] [Paper]

  
  We examine loan insurance—credit risk transfer upon origination—in a model in which lenders can screen, learn loan quality over time, and can sell loans. Lenders with lower screening ability self-select into insurance that commits them to not exploiting future private information about loan quality. Hence, loan insurance also improves the quality of uninsured loans traded but lowers lending standards. Since lenders fail to internalize the benefit for liquidity of uninsured loans—a pecuniary externality—insurance is excessively low and should be subsidized. Our results contribute to the debate about reforming government-sponsored mortgage guarantees.



• Bank Runs, Bank Competition and Opacity (with David Martinez-Miera) [Abstract]

  
  We model asset opacity and deposit rate choices of banks who imperfectly compete for uninsured deposits, are subject to runs, and face a threat of entry. Higher competition increases deposit rates and bank fragility, resulting in an intermediate socially optimal level of bank competition. We provide a novel theory of bank opacity. The cost of opacity is more partial runs by creditors, which induces costly liquidation of investment and lowers current profits. The benefit of opacity is to deter entry of competitors, which increases bank charter value. Banks can be excessively opaque, motivating transparency regulation.



• A wake-up call theory of contagion (with Christoph Bertsch) [Abstract] [Paper]

  
  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 and Resubmit (second round)


• Cheap but Flighty (with Enrico Perotti) [Abstract]

  
  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.

  Revise and Resubmit


• Trading for Bailouts (with Caio Machado, Ana Elisa Pereira) [Abstract] [Paper]

  
  Government interventions such as bailouts are often implemented in times of high uncertainty. Policymakers may therefore rely on information from financial markets to guide their decisions. We propose a model in which a policymaker learns from market activity and where market participants have high stakes in the intervention. We study how the strategic behavior of informed traders affects market informativeness, the probability and efficiency of bailouts, and stock prices. We apply the model to study the liquidity support of distressed banks and derive implications for market informativeness and policy design. Commitment to a minimum liquidity support can increase market informativeness and welfare.

Last update: 15 December 2020