Welcome to my personal homepage!

I am a research economist within the European Central Bank's Financial Research Division. I am also a Research Affiliate at CEPR (Financial Economics), a member of the Finance Theory Group, a Research Associate at LSE's Systemic Risk Centre, and a Research Affiliate at Halle Institute for Economic Research.

Here is my [CV] and my page on Google Scholar.

Research:

Research interests

• Financial Intermediation, Global Games, Central Bank Digital Currency (CBDC), International Finance

Publications

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

  
  We offer a theory of financial 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 linked by an initially unobserved macro shock. A crisis in region 1 is a wake-up call to investors in region 2. It induces them to reassess the regional fundamental and acquire information about the macro shock. Contagion can occur even after investors learn that region 2 has no ex-post exposure to region 1. We explore normative and testable implications of the model. In particular, our results rationalize evidence about contagious currency crises and bank runs after wake-up calls and provide some guidance for future empirical work.

  Review of Finance, Accepted


• Cheap but Flighty: A Theory of Safety-seeking Capital Flows (with Enrico Perotti) [Abstract] [Paper]

  
  We offer a model of financial intermediaries as safe-asset providers in an international context. Investors from countries exposed to expropriation risk seek to invest in safe-haven countries in order to satisfy a demand for safety. Intermediaries compete for such cheap funding by carving out safe claims, which requires demandable debt. While these safety-seeking inflows allow developed countries to lower their funding cost and expand investment, risk-intolerant investors achieve safety by withdrawing even under minimal residual risk. As a result, safety-seeking inflows into developed countries not only reallocate but also create risk. Early liquidation inefficiently diverts scarce resources from productive uses, so a domestic planner wishes to contain the scale of safety-seeking inflows. A macroprudential regulator imposes a Pigouvian tax on safety-seeking inflows.

  Journal of Banking and Finance, Volume 131 (C), 2021


• 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, 140(1), April 2021, Pages 145-74


• 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, Volume 46, April 2021


• 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)

Working papers

• Cyber Security and Ransomware in Financial Markets (with Michael Brolley, David Cimon, Ryan Riordan) [Abstract] [Paper]

  
  Financial markets are under constant threat of cyber attacks. We develop a principal-agent model of cyber-attacking with fee-paying clients who delegate security decisions to financial platforms. We derive testable implications about cyber attack vulnerability and fees charged. We also characterize the form of cyber attack chosen by attackers. Successful ransomware attacks are more likely than traditional attacks. When security is unobservable, platforms underinvest in security. Welfare can improve by targeting security investment through regulation (e.g. minimum security standards), or by improving transparency (e.g. security ratings). Our results support regulatory efforts to increase transparency around cyber security and cyber attacks.



• The Digital Economy, Privacy, and CBDC (with Peter Hoffmann and Cyril Monnet) [Abstract] [Paper]

  
  We study a model of financial intermediation, payment choice, and privacy in the digital economy. Cash preserves anonymity but cannot be used for more efficient online transactions. By contrast, bank deposits can be used online but do not preserve anonymity. Banks use the information contained in deposit flows to extract rents from merchants in need of financing. Payment tokens issued by digital platforms allow merchants to hide from banks but enable platforms to stifle competition. An independent digital payment instrument (a CBDC) that allows agents to share their payment data with selected parties can overcome all frictions and achieves the efficient allocation.

  To be presented at EFA 2022


• 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 study a model in which a policymaker learns from market activity and traders have high stakes in the intervention (for instance, due to blockholding). We show that the strategic behavior of such traders reduces market informativeness and the efficiency of bailouts. We derive testable implications regarding block size, informativeness, and intervention outcomes. Applying the model to the liquidity support of distressed banks, a gradual implementation of assistance can increase market informativeness and welfare.

  To be presented at FIRS 2022 and EFA 2022


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

  
  We study third-party loan guarantees in a model in which lenders can screen, learn loan quality over time and can sell loans before maturity when in need of liquidity. Loan guarantees improve market liquidity and reduce lending standards, with a positive overall welfare effect. Guarantees improve the average quality of non-guaranteed loans traded and thus the market liquidity of these loans due to both selection and commitment. Because of this positive pecuniary externality, guarantees are insufficient and should be subsidized. Our results contribute to a debate about reforming government-sponsored mortgage guarantees by Fannie Mae and Freddie Mac.

  To be presented at EFA 2022


• Does IT help? Information Technology in Banking and Entrepreneurship (with Sebastian Doerr, Nicola Pierri, Yannick Timmer) [Abstract] [Paper]

  
  This paper provides novel evidence on the importance of information technology (IT) in banking for entrepreneurship. To guide our analysis, we build a parsimonious model of bank screening and lending. The model predicts that IT in banking can spur entrepreneurship by making it easier for startups to borrow against collateral. We empirically show that job creation by young rms is stronger in US counties that are more exposed to IT-intensive banks. Consistent with a strengthened collateral channel, entrepreneurship increases by more in IT-exposed counties when house prices rise. Regressions at the bank level further show that banks' IT adoption makes credit supply more responsive to changes in local house prices, and reduces the importance of geographical distance between borrowers and lenders. These results suggest that IT adoption in the nancial sector can increase dynamism by improving startups' access to nance.

  Presented at FIRS 2021


• Safe Assets and Financial Fragility (with Marco Macchiavelli) [Abstract] [Paper]

  
  How does the access to safe assets affect the fragility and lending behavior of financial intermediaries? We develop a global-game model of investor redemptions from money market funds that hold safe assets and fund risky corporate borrowers. Using the 2013 U.S. debt limit episode and the Federal Reserve's Overnight Reverse Repurchase (ONRRP) facility as our empirical laboratory, we provide evidence consistent with the model's implications. In particular, access to a safe asset—the ONRRP—attenuates investor redemption incentives and allows money market mutual funds to maintain their lending to corporate borrowers. Overall, our results suggest that the public provision of a safe asset reduces intermediary fragility and increases lending to the real economy.



• Real Interest Rates, Bank Borrowing and Fragility (with Kartik Anand, Philipp Koenig) [Abstract] [Paper]

  
  How do real interest rates affect bank fragility? We study this issue in a model in which bank borrowing is subject to rollover risk. Optimal borrowing trades off the benefit of additional profitable investments with the cost of greater risk of a bank run. Changes in the interest rate affect the price and amount of borrowing, both of which influence bank fragility in opposite directions. We show that the marginal impact of changes to the interest rate on bank fragility also depends on the level of the interest rate. Furthermore, we derive testable implications that may guide future empirical work.



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

  
  We model the opacity and deposit rate choices of banks that imperfectly compete for uninsured deposits, are subject to runs, and face a threat of entry. We show how shocks that increase bank competition or bank transparency increase deposit rates, costly withdrawals, and thus bank fragility. Therefore, perfect competition is not socially optimal. We also propose a theory of bank opacity. The cost of opacity is more withdrawals from a solvent bank, lowering bank profits. The benefit of opacity is to deter the entry of a competitor, increasing future bank profits. The excessive opacity of incumbent banks rationalizes transparency regulation.

Last update: 21 June 2022